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Labor Contracts under Asymmetric Information When Workers are Free to Quit

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  • Margaret A. Meyer

Abstract

This paper examines the impact of workers' ability to quit on the performance of labor contracts between workers and privately informed firms. While the need to induce workers to remain with the firm necessarily lowers total welfare, the effect on employment levels is to reduce the magnitude of the inefficiency due to asymmetric information, whether this inefficiency is under- or overemployment. The model predicts that employment distortions increase with the strength of lock-in effects on workers, a prediction which contrasts with the results of efficiency wage models and which may help in empirical testing of labor contract theory.

Suggested Citation

  • Margaret A. Meyer, 1987. "Labor Contracts under Asymmetric Information When Workers are Free to Quit," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 527-551.
    • Handle: RePEc:oup:qjecon:v:102:y:1987:i:3:p:527-551.
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    File URL: http://hdl.handle.net/10.2307/1884216
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    Cited by:

    1. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 329, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Jonathan P. Thomas, 1999. "Fair Pay and a Wagebill Arguement for Wage Rigidity and Excessive Employment Variability," Discussion Paper Series, School of Economics and Finance 199919, School of Economics and Finance, University of St Andrews.
    3. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
    4. Tsoulouhas, Theofanis, 1996. "Labor and credit contracts with asymmetric information and bankruptcy," European Economic Review, Elsevier, vol. 40(8), pages 1665-1682, November.
    5. Canegallo, Claudia, 1999. "Funzionamento del mercato del lavoro in presenza di informazione asimmetrica. Una rassegna della letteratura," POLIS Working Papers 8, Institute of Public Policy and Public Choice - POLIS.
    6. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS

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