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Indiana University Bloomington

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Journal Articles

An Income-Satiation Model of Efficiency Wages

1992, Economic Inquiry

Eric Bennett Rasmusen


Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for such wages is ``bonding'': by increasing the worker's fear of discharge, high wages increase the worker's cost from punishment. A neglected alternative is ``satiation'': by decreasing the worker's marginal utility of income, the high wage decreases the benefit from misbehavior. Satiation, unlike bonding, applies even in a one- period model, but it relies on the misbehavior having a monetary benefit and on at least part of the punishment being nonmonetary.


Rasmusen, Eric Bennett (1992), "An Income-Satiation Model of Efficiency Wages," Economic Inquiry, Vol. 30, No. 3, July, 467-478.