Involuntary Employment in Contracts with Risky Job Search

Eleanor Brown ()

Economic Inquiry, 1989, vol. 27, issue 1, 93-104

Abstract: The implications of partially insurable job search risk for incentive compatibility in a standard contracting framework are explored. When unemployment spells provoke job search, workers face risk in spell duration and reemployment wages. When search effort is not variable, contracts including unemployment insurance will yield involuntary employment. When search effort is diminished by unemployment insurance benefits, firms shift some compensation back to wages, increasing the relative attractiveness of employment. The analysis begins with a theorem on incomplete insurance by Imai, Geanakoplos, and Ito (1981) for which a simple proof and economic intuition are provided. Copyright 1989 by Oxford University Press.

Date: 1989
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