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Unemployment with Observable Aggregate Shocks

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  • Maskin, Eric S.
  • Grossman, Sanford J.
  • Hart, Oliver D.

Abstract

A general equilibrium model of' optimal employment contracts is developed where firms have better information about labor's marginal product than workers. It is optimal for the wage to be tied to the level of employment, to prevent the firm from falsely stating that the marginal product is low and cutting the wage. It is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3448840/Hart_UnemploymentObservableAgg.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3448840.

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Date of creation: 1983
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Publication status: Published in Journal of Political Economy -Chicago-
Handle: RePEc:hrv:faseco:3448840

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References

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  1. Grossman, Sanford J & Weiss, Laurence, 1982. "Heterogeneous Information and the Theory of the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 699-727, August.
  2. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 49(1), pages 33-64, January.
  3. Blanchard, Olivier Jean, 1979. "Wage Indexing Rules and the Behavior of the Economy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 798-815, August.
  4. Holmstrom, Bengt R & Weiss, Laurence, 1985. "Managerial Incentives, Investment, and Aggregate Implications: Scale Effects," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 403-25, July.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  6. repec:nbr:nberre:0126 is not listed on IDEAS
  7. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, Elsevier, vol. 18(1), pages 171-196.
  8. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 71(2), pages 301-07, May.
  9. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(1), pages 79-95, February.
  10. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  11. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, Elsevier, vol. 18(2), pages 171-196.
  12. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers, National Bureau of Economic Research, Inc 0303, National Bureau of Economic Research, Inc.
  13. Dasgupta, Partha S & Hammond, Peter J & Maskin, Eric S, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 46(2), pages 185-216, April.
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Citations

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Cited by:
  1. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Imperfect Information, Credit Markets and Unemployment," NBER Working Papers, National Bureau of Economic Research, Inc 2093, National Bureau of Economic Research, Inc.
  2. Matthew B. Canzoneri & Anne C. Sibert, 1984. "The macroeconomic implications of labor contracting with asymmetric information," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 248, Board of Governors of the Federal Reserve System (U.S.).
  3. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," NBER Working Papers, National Bureau of Economic Research, Inc 1412, National Bureau of Economic Research, Inc.
  4. Duranton, Gilles & Haniotis, Toni, 2004. "A comparison between economic systems with an application to transition," Journal of Public Economics, Elsevier, Elsevier, vol. 88(9-10), pages 2125-2157, August.
  5. Pablo Ruiz Verdú, 2002. "Employer Behavior When Workers Can Unionize," Business Economics Working Papers, Universidad Carlos III, Departamento de Economía de la Empresa wb020803, Universidad Carlos III, Departamento de Economía de la Empresa.
  6. Russell Cooper, 1986. "Optimal Labor Contracts, Imperfect Competition and Underemployment Equilibria: A Framework for Analysis," NBER Working Papers, National Bureau of Economic Research, Inc 2060, National Bureau of Economic Research, Inc.
  7. William P. Osterberg, 1992. "Intervention and the bid-ask spread in G-3 foreign exchange rates," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q II, pages 2-13.
  8. Robert G. King & Joseph G. Haubrich, 1983. "Sticky Prices, Money and Business Fluctuations," NBER Working Papers, National Bureau of Economic Research, Inc 1216, National Bureau of Economic Research, Inc.
  9. Ian M. McDonald, 1984. "Trying to Understand Stagflation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 17(3), pages 32-56.
  10. Kahn, Charles M. & Mookherjee, Dilip, 1995. "Market failure with moral hazard and side trading," Journal of Public Economics, Elsevier, Elsevier, vol. 58(2), pages 159-184, October.
  11. Joseph G. Haubrich, 1992. "Sluggish deposit rates: endogenous institutions and aggregate fluctuations," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q II, pages 23-35.

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