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Wage-Employment Contracts

Author

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  • Kahn, Charles M.
  • Green, Jerry

Abstract

This paper studies the efficient agreements about the dependence of workers' earnings on employment, when the employment level is controlled by firms. The firms' superior information about profitability conditions is responsible for this form of contract governance. Under plausible assumptions, such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk. It is shown that, if leisure is a normal good and firms are risk-neutral, employment is always above the efficient level. Such a one-period implicit contracting model cannot, therefore, be used to "explain" unemployment as a rational byproduct of risk sharing between workers and a risk-neutral firm under conditions of asymmetric information.

Suggested Citation

  • Kahn, Charles M. & Green, Jerry, 1983. "Wage-Employment Contracts," Scholarly Articles 3203642, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3203642
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    Citations

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    Cited by:

    1. Haltiwanger, John & Waldman, Michael, 1986. "Insurance and Labor Market Contracting: An Analysis of the Capital Market Assumption," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 355-375, July.
    2. Atkeson, Andrew & Kehoe, Patrick J, 1996. "Social Insurance and Transition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 377-401, May.
    3. Lloyd Ulman, 1992. "Why Should Human Resource Managers Pay High Wages?," British Journal of Industrial Relations, London School of Economics, vol. 30(2), pages 177-212, June.
    4. Hahn, Volker, 2017. "Committee design with endogenous participation," Games and Economic Behavior, Elsevier, vol. 102(C), pages 388-408.
    5. Bengt Holmstrom & Laurence Weiss, 1982. "Managerial Incentives, Investment and Aggregate Implications, Part I: Scale Effects," Discussion Papers 537, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October.
    7. Pagnozzi, Marco & Piccolo, Salvatore, 2017. "Contracting with endogenous entry," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 85-110.
    8. Ian M. McDonald, 1984. "Trying to Understand Stagflation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 17(3), pages 32-56, November.
    9. Snell, Andy & Stüber, Heiko & Thomas, Jonathan P., 2024. "Job security, asymmetric information, and wage rigidity," European Economic Review, Elsevier, vol. 161(C).
    10. Finkle, Aaron, 2005. "Relying on information acquired by a principal," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 263-278, April.
    11. Chari, V V & Jones, Larry E & Manuelli, Rodolfo E, 1989. "Labor Contracts in a Model of Imperfect Competition," American Economic Review, American Economic Association, vol. 79(2), pages 358-363, May.
    12. Jonathan Thomas, 2000. "Fair Pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability," CESifo Working Paper Series 234, CESifo.
    13. Joseph E. Stiglitz, 1984. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc.
    14. Robert H. Topel & Finis Welch, 1986. "Efficient Labor Contracts with Employment Risk," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 490-507, Winter.
    15. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    16. Martin C. McGuire, 2000. "Provision for Adversity," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 730-752, December.
    17. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
    18. John Haltiwanger & Michael Waldman, 1984. "Insurance Aspects of Labor Market Contracting: An Overview," UCLA Economics Working Papers 348, UCLA Department of Economics.
    19. Roger A. McCain, 1987. "Acceptable Contracts, Opportunism, and Rigid Hourly Wages," Eastern Economic Journal, Eastern Economic Association, vol. 13(3), pages 205-213, Jul-Sep.
    20. Ulman, Lloyd, 1992. "Why Should Human Resource Managers Pay High Wages?," Institute for Research on Labor and Employment, Working Paper Series qt8378t1rz, Institute of Industrial Relations, UC Berkeley.
    21. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    22. Ed Nosal & Richard Rogerson & Randall Wright, 1991. "A note on labor contracts with private information and household production," Staff Report 131, Federal Reserve Bank of Minneapolis.
    23. Martin C McGuire & Gary S Becker, 2006. "Reversal of Misfortune: Parodox in Optimization Across Contingencies," Levine's Working Paper Archive 618897000000001030, David K. Levine.
    24. Andrew Atkeson & Patrick J. Kehoe, 1995. "Optimal social insurance, incentives, and transition," Working Papers 546, Federal Reserve Bank of Minneapolis.
    25. Anton Miglo, 2006. "Optimal compensation contracts under asymmetric information concerning expected earnings," Working Papers 0613, University of Guelph, Department of Economics and Finance.

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