Testing Dynamic Models of Worker Effort

This article derives three dynamic models of worker effort determi-nation, based on a shirking efficiency wage model, a compensating differentials model, and a union-firm bargaining model. It shows that all of these three models have the same long-run comparative statics but differ in their short-run dynamics. We use these different predic-tions about the dynamics as a basis for testing the models. Euler equa-tions for each model are estimated using panel data on 486 U.K. com-panies. The evidence supports the shirking model in firms with low levels of unionization but the bargaining model in highly unionized industries. I