Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment

W. Bentley Macleod and James Malcomson

Econometrica, 1989, vol. 57, issue 2, 447-80

Abstract: The theoretical foundations of efficiency wages are explored for a model with employees' performance unverifiable. The set of outcomes implementable by self-enforcing (perfect equilibrium) implicit bilateral contracts is characterized. Market equilibrium is then analyzed. Perfect equilibria exist with any division between firm and employee of the gains from employment and with unfilled vacancies and unemployed workers occurring together. A renegotiation proofness criterion ensures that either all workers are employed or all jobs filled, but any division of the gains is still possible. Restrictions on beliefs that result in a Walrasian outcome, and in an efficiency wage outcome, are explored. Copyright 1989 by The Econometric Society.

Date: 1989
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Working Paper: Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment (1986)
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