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Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency

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  • Newbery, David M
  • Stiglitz, Joseph E

Abstract

Standard implicit contract theory can explain wage rigidity but not unemployment and pays insufficient attention to the general equilibrium aspects and constraints limiting the set of feasible contracts. Implicit contracts must specify an enforcement mechanism, can only be conditional on observable information, and must be of limited complexity. Without these restrictions contracts generate full employment which is constrained inefficient. Natural restrictions on enforceability or complexity alone do not produce unemployment, though limited observability may. With two or more restrictions unemployment may result. Specifically, periodic unemployment can arise if contracts are of limited complexity and cannot be enforced through third parties. Copyright 1987 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 97 (1987)
Issue (Month): 386 (June)
Pages: 416-30

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Handle: RePEc:ecj:econjl:v:97:y:1987:i:386:p:416-30

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Cited by:
  1. Giulio Palermo, 2005. "Misconceptions of Power: From Alchian and Demsetz to Bowles and Gintis," Working Papers ubs0510, University of Brescia, Department of Economics.
  2. Kittel, Bernhard, 2001. "How bargaining mediates wage determination: An exploration of the parameters of wage functions in a pooled time-series cross-section framework," MPIfG Discussion Paper 01/3, Max Planck Institute for the Study of Societies.
  3. Anne Perrot, 1990. "La théorie des contrats implicites : bilan et perspectives," Économie et Prévision, Programme National Persée, vol. 92(1), pages 15-20.

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