Working Paper: NBER ID: w0675
Authors: Jerry Green; Charles H. Kahn
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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal contracts (D86) | employment fluctuations (J63) |
| firms maximizing profits (holding workers' utility constant) (D21) | employment fluctuations (J63) |
| risk-sharing vs profit maximization (L21) | income fluctuation (E25) |
| information asymmetry (D82) | employment levels (J23) |
| risk-sharing practices (D16) | employment outcomes (J68) |