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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. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
  2. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 810-833, December.
  3. S. Grossman & L. Weiss, . "Heterogeneous Information and the Theory of the Business Cycle," Rodney L. White Center for Financial Research Working Papers 16-80, Wharton School Rodney L. White Center for Financial Research.
  4. repec:nbr:nberre:0126 is not listed on IDEAS
  5. 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, vol. 46(2), pages 185-216, April.
  6. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(1), pages 171-196.
  7. Blanchard, Olivier Jean, 1979. "Wage Indexing Rules and the Behavior of the Economy," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 798-815, August.
  8. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(2), pages 171-196.
  9. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  10. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  11. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  12. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
  13. Holmstrom, Bengt R & Weiss, Laurence, 1985. "Managerial Incentives, Investment, and Aggregate Implications: Scale Effects," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 403-25, July.
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Cited by:
  1. Robert G. King & Joseph G. Haubrich, 1983. "Sticky Prices, Money and Business Fluctuations," NBER Working Papers 1216, National Bureau of Economic Research, Inc.
  2. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," Working papers 349, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Russell Cooper, 1986. "Optimal Labor Contracts, Imperfect Competition and Underemployment Equilibria: A Framework for Analysis," NBER Working Papers 2060, National Bureau of Economic Research, Inc.
  4. Pablo Ruiz VerdĂș, 2002. "Employer Behavior When Workers Can Unionize," Business Economics Working Papers wb020803, Universidad Carlos III, Departamento de EconomĂ­a de la Empresa.
  5. William P. Osterberg, 1992. "Intervention and the bid-ask spread in G-3 foreign exchange rates," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-13.
  6. Greenwald, Bruce C. & Stiglitz, Joseph E., 1987. "Imperfect information, credit markets and unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 444-456.
  7. Duranton, Gilles & Haniotis, Toni, 2004. "A comparison between economic systems with an application to transition," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2125-2157, August.
  8. Kahn, Charles M. & Mookherjee, Dilip, 1995. "Market failure with moral hazard and side trading," Journal of Public Economics, Elsevier, vol. 58(2), pages 159-184, October.
  9. Joseph G. Haubrich, 1992. "Sluggish deposit rates: endogenous institutions and aggregate fluctuations," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 23-35.
  10. Ian M. McDonald, 1984. "Trying to Understand Stagflation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 17(3), pages 32-56.
  11. Matthew B. Canzoneri & Anne C. Sibert, 1984. "The macroeconomic implications of labor contracting with asymmetric information," International Finance Discussion Papers 248, Board of Governors of the Federal Reserve System (U.S.).

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