Abstract

One of the most intriguing and important focal points of behavioral economics relates to research that falls under the analytical umbrella of efficiency wage and x-efficiency theories. Fundamental to these theories is the assumption of effort discretion—that individuals have some control over both the quality and quantity dimensions of the effort they put into the production process, and that this effort is maximized only under very special circumstances. Conventional economic theory assumes that effort is not a variable and that effort is maximized given the firm’s production function and the economic agent’s human capital endowment. For example, effort is assumed to be maximized in both its quantity and quality dimensions irrespective of market conditions or the firm’s industrial relations system. In terms of modeling effort variability and its consequences, the assumption of effort variability dominates any of the other assumptions that are often part and parcel of the efficiency wage/x-efficiency narrative, such as irrationality, quasi-rationality, and imperfect product markets. Indeed, such assumptions, I argue, are subsidiary or secondary assumptions that are not necessary to modeling key economic scenarios in terms of effort variability.