Wage-Employment Contracts: Global Results
NBER Working Paper No. 675
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.
Published: Green, Jerry R. and Kahn, Charles M. "Wage-Employment Contracts: Global Results." Quarterly Journal of Economics, Vol. 98, Supplement, (1983), pp. 173-188.