NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Arthur Hosios

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Working Papers

March 1990Implicit Contracts, Labor Mobility and Unemployment
with Richard J. Arnott, Joseph Stiglitz: w2316
Firms' inability to monitor their employees' search effort forces a tradeoff between risk-bearing and incentive considerations when designing employment-related insurance. Since the provision of insurance against firm-specific shocks adversely affects workers' incentives to find better jobs, the optimal contract provides only partial insurance: it prescribes low (high) wages and under (over) employment to encourage workers to leave (stay) at low (high) productivity firms; and it employs quits and layoffs as alternative means of inducing separations at low productivity firms, with the mix depending upon the relative efficiency of the on- and off-the-job search technologies. Our analysis of implicit contracts with asymmetric search information establishes that any consistent explanation for ...

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