Dynamic Efficiency Wages: Employees have no non-labour market income and have per-period utility functions given by: u(ct,et)=ctet where c is consumption and e is the amount of effort expended on the job. Their employer observes whether they are actually working each period with probability =0.3. If they are caught not working, the employer does not pay them and they are not allowed to work again nor receive any unemployment benefits (so u=0 ). The amount produced by the employee in any period is y(ei)={0ifei