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Implicit Contracts Under Asymmetric Information

Sanford J. Grossman and Oliver D. Hart
The Quarterly Journal of Economics
Vol. 98, Supplement (1983), pp. 123-156
Published by: Oxford University Press
DOI: 10.2307/1885377
Stable URL: http://www.jstor.org/stable/1885377
Page Count: 34
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Implicit Contracts Under Asymmetric Information
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Abstract

A model is analyzed where the firm knows more about its own profit opportunities than do its workers. It is shown that because of this asymmetric information, shifts in the productivity of labor can lead to large variations in employment even when labor supply is very inelastic. This is because the employment level chosen by the firm reveals information about its own profitability. This information is useful in making insurance contracts incentive-compatible. Comparative statics results are derived that show the extent to which firm or worker risk aversion, and the probability distribution of labor productivity affect the optimal employment contract and the equilibrium degree of employment variability.

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