NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Wage-Employment Contracts: Global Results

Jerry R. Green, Charles M. Kahn

NBER Working Paper No. 675
Issued in May 1981
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w0675

Published: Green, Jerry R. and Kahn, Charles M. "Wage-Employment Contracts: Global Results." Quarterly Journal of Economics, Vol. 98, Supplement, (1983), pp. 173-188.

 
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