* I thank Geir Asheim, Kare Petter Hagen and two anonymous referees for valuable comments. I have also benefited from presenting this work at seminars at the Norwegian School of Economics and Business Administration and at FIEF Stockholm. The paper was partly written during a visit to the Centre for Labour Economics at LSE, and I thank the Centre for its hospitality.
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Kjell Erik Lommerud (1989) studied this question.
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