Incomplete Contracts and Economic Rent

The assignment discusses incomplete contracts, economic rent, and labour discipline models. It highlights that introducing incentives can affect a lecturer's effort level, while it may be challenging to measure performance. The concept of economic rent is applied to employees who experience negative economic rent due to work conditions such as overtime without compensation, limited food coupons, and punitive measures. The assignment also compares labour market responses in China and Korea, concluding that firms are willing to pay wages based on marginal productivity, and there may be more involuntary unemployment in North Korea compared to China.

Incomplete Contracts
a) It would be necessary to introduce an incentive where the lecturer will receive a
significant portion of additional compensation in case nearly more than half of the class
reports good grades. This might positively affect the level of effort that the lecturer puts
into teaching.
b) It may be difficult to include in the contract the nature of measure used in assessing the
performance of the lecturer. This is because different factors may influence performance
at a given point in time.
Economic Rent
a) Actual Amount Earned = 25 *40 * 63
= 63000
Expected Amount = 535 * 63/2
= 16852.5
Economic Rent = 63000 - 16852.5 - 12600
= 33547.5
b) In this case, the employees experience nearly zero or negative economic rent especially
due to the work conditions that they are exposed to. For example they are exposed to
working overtime without additional compensation. Also the food coupons they receive
in exchange for work can only afford them rice or corn. In addition punitive measures are
taken against the workers due to insubordination. This means that there is a high level fo
disutility of the laborers efforts compared to the wages that thy are provided with.
Labour Discipline Model

b) In this case, China employees have higher responsiveness of the daily wages to the daily
efforts compared to the workers in Korea. This may be due to the working conditions as well as
the level of regulation that is present in the different environments.
c)

In this case, the firms are willing to pay wages where the marginal costs of labour are equal to
the marginal productivity of labor.
d) There is more involuntary unemployment in North Korea compared to China. This is because
in North Korea there might be an excess of available labor at the prevailing wage rate compared
to the workers in China.