Labor-Market Implications of Contracts under Moral Hazard

Kangwoo Park
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Kangwoo Park: Seoul National University

No 277, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: The optimal contract under moral hazard is embedded in a standard Mortensen-Pissarides matching model. Under standard assumptions, we show that when firms cannot perfectly observe workers' productivity the optimal contract can take the form of a debt contract exhibiting almost a fixed wage along the business cycle. When this contract is embedded in the standard matching model, the calibrated model generates a more stable wage and more volatile employment than the model with Nash bargaining.

Date: 2007
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