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Wage-Employment Contracts

Jerry Green and Charles M. Kahn
The Quarterly Journal of Economics
Vol. 98, Supplement (1983), pp. 173-187
Published by: Oxford University Press
DOI: 10.2307/1885379
Stable URL: http://www.jstor.org/stable/1885379
Page Count: 15
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Wage-Employment Contracts
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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.

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