A firm has a task to carry out that involves opportunities to shirk with little probability of detection. If it can hire a non-shirking employee for this task, it will make a lot of money. Its strategy for finding a non-shirker is to pay a very low wage at first, then increase the wage gradually each year so that, by the time the worker has been with the firm for 10 years, he will be earning more than he could elsewhere. The present value of the wage premiums in the later years is larger than the present value of the shortfall in the early years.
a. Explain how this strategy helps to attract a non-shirking employee. Would the same strategy work if the probability of detecting shirking were zero?
b. Explain why the ability of the firm to implement this strategy might depend to an extent on its own reputation in the labor market.