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Abstract
This thesis examines how labor contracts are enforced when the contractual relationship is long lived. I argue that contracting as a form of transacting can only be understood when there are gains from committing to an enduring relationship, but that there are intrinsic reasons why any contract may be difficult to enforce. One primary reason is asymmetry of information. The literature has primarily dealt with this issue in a static context. I show that when the intertemporal aspects of the contractual agreement is modeled then the contractants have more options and strategies available to ensure that all parties abide by the terms of the contract. I show that this perspective provides a dynamic model of strike behavior, and argue that such a theory is needed to explain the evidence. I then show that the contractants may use different methods of enforcing the contract, and in particular one can think of fluctuations in wages as being an important instrument. This perspective provides a normative theory of wage dynamics as part of a constrained efficient enforcement mechanism.
