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Implicit Contracts, Labor Mobility and Unemployment


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  • Richard J. Arnott
  • Arthur Hosios
  • Joseph Stiglitz


Firms' inability to monitor their employees' search effort forces a tradeoff between risk-bearing and incentive considerations when designing employment-related insurance. Since the provision of insurance against firm-specific shocks adversely affects workers' incentives to find better jobs, the optimal contract provides only partial insurance: it prescribes low (high) wages and under (over) employment to encourage workers to leave (stay) at low (high) productivity firms; and it employs quits and layoffs as alternative means of inducing separations at low productivity firms, with the mix depending upon the relative efficiency of the on- and off-the-job search technologies. Our analysis of implicit contracts with asymmetric search information establishes that any consistent explanation for worksharing, layoffs, severance pay, quits and unemployment must focus on questions of labor mobility.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2316.

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Date of creation: Jul 1987
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Publication status: published as The American Economic Review, Vol. 78, No. 5, pp. 1046-1066, (December 1988).
Handle: RePEc:nbr:nberwo:2316

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