Wage-Employment Contracts: Global Results

Jerry Green and Charles Kahn

No 675, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1981-05
Note: EFG
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Published as Green, Jerry R. and Kahn, Charles M. "Wage-Employment Contracts: Global Results." Quarterly Journal of Economics, Vol. 98, Supplement, (1983), pp. 173-188.

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