LONG-TERM EMPLOYMENT RELATIONSHIPS BY CREDIBLE COMMITMENTS

Abstract

Carl Zeiss, a famous German firm, was among the first companies to provide employee benefits. Its sole owner, a foundation known as the Carl-Zeiss-Stiftung, promised a century ago to fulfill almost revolutionary social-welfare obligations to company workers. Can this promise be explained within a model of rational behavior? Using game theory, the relationship between employer and employee can be reconstructed as a Prisoner's Dilemma, in which both sides are interested in future cooperation but have incentives to terminate the relationship opportunistically. One possible solution is the implementation of institutionalized self-commitments; that is, a pension fund and severance pay are `hostages' that serve as incentives. Analysis indicates that the Carl-Zeiss-Stiftung can be seen as a historical example of a private-sector organization that committed itself to providing benefits to solve a basic cooperation problem. The foundation's statute provides incentives for the both employer and employees to establish a long-term employment relationship. In fact, this was exactly the intention of the founder, Ernst Abbe.