Wages above market can elicit higher effort via norms of reciprocity.
Akerlof's 1982 model. Wages above the market-clearing rate are not inefficiency but purchase of discretionary effort, which explains why firms resist cutting pay in downturns.
In practice
- An employer paying visibly above the local rate finds turnover collapses and effort rises without any change to supervision.
- A firm that cuts pay to the market rate in a downturn keeps the same staff and loses the discretionary effort it never priced.