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Contractual Incompleteness, Unemployment, and Labour Market Segmentation

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  • Steffen Altmann
  • Armin Falk
  • Andreas Grunewald
  • David Huffman

Abstract

This article provides evidence that involuntary unemployment, and the segmentation of labour markets into firms offering "good" and "bad" jobs, may both arise as a consequence of contractual incompleteness. We provide a simple model that illustrates how unemployment and market segmentation may jointly emerge as part of a market equilibrium in environments where work effort is not third-party verifiable. Using experimental labour markets that differ only in the verifiability of effort, we demonstrate empirically that contractual incompleteness can cause unemployment and segmentation. Our data are also consistent with the key channels through which the model explains the emergence of both phenomena. Copyright 2014, Oxford University Press.

Suggested Citation

  • Steffen Altmann & Armin Falk & Andreas Grunewald & David Huffman, 2014. "Contractual Incompleteness, Unemployment, and Labour Market Segmentation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 30-56.
    • Handle: RePEc:oup:restud:v:81:y:2014:i:1:p:30-56
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    File URL: http://hdl.handle.net/10.1093/restud/rdt034
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    Citations

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    Cited by:

    1. Fongoni, Marco & Dickson, Alex, 2015. "A Theory of Wage Setting Behavior," SIRE Discussion Papers 2015-57, Scottish Institute for Research in Economics (SIRE).
    2. Dato, Simon & Grunewald, Andreas & Kräkel, Matthias & Müller, Daniel, 2016. "Asymmetric employer information, promotions, and the wage policy of firms," Games and Economic Behavior, Elsevier, vol. 100(C), pages 273-300.
    3. Fongoni, Marco & Dickson, Alex, 2015. "A Theory of Wage Setting Behavior," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-57, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Radoslawa Nikolowa, 2017. "Motivate and select: Relational contracts with persistent types," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 624-635, September.
    5. Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
    6. Englmaier, Florian & Segal, Carmit, 2016. "Morale, Relationships, and Wages: An Experimental Study," VfS Annual Conference 2016 (Augsburg): Demographic Change 145662, Verein für Socialpolitik / German Economic Association.
    7. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    8. Charness, Gary & Cobo-Reyes, Ramón & Jiménez, Natalia & Lacomba, Juan A. & Lagos, Francisco, 2017. "Job security and long-term investment: An experimental analysis," European Economic Review, Elsevier, vol. 95(C), pages 195-214.
    9. David J. Freeman & Erik O. Kimbrough & Garrett M. Petersen & Hanh T. Tong, 2018. "Instructions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 4(2), pages 165-179, December.
      • David J. Freeman & Erik O. Kimbrough & Garrett M. Petersen & Hanh T. Tong, 2017. "Instructions," Discussion Papers dp17-12, Department of Economics, Simon Fraser University.
    10. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    11. Elwyn Davies & Marcel Fafchamps, 2017. "When No Bad Deed Goes Punished: Relational Contracting in Ghana versus the UK," NBER Working Papers 23123, National Bureau of Economic Research, Inc.
    12. Elwyn Davies & Marcel Fafchamps, 2015. "When No Bad Deed Goes Punished: A Relational Contracting Experiment in Ghana," CSAE Working Paper Series 2015-08, Centre for the Study of African Economies, University of Oxford.
    13. Akshay Bhat, 2019. "Bounded Rationality, Motivation & Private Information And Its Implications On Contracts," Working papers 2019-32-07, Voice of Research.
    14. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    15. Davies, Elwyn & Fafchamps, Marcel, 2021. "When no bad deed goes punished: Relational contracting in Ghana and the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 714-737.
    16. Fahn, Matthias & MacLeod, W. Bentley & Muehlheusser, Gerd, 2023. "Past and Future Developments in the Economics of Relational Contracts," IZA Discussion Papers 16427, Institute of Labor Economics (IZA).

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