This paper investigates the claim, often put forth by Real Business Cycle proponents ("e.g. Prescott(1986)), that the poor performances of their models in matching real world aggregate labor market behavior are due to the fact that observed real wage payments do not correspond to the actual marginal productivity of labor but contain an insurance component which cannot be accounted for by the Walrasian pricing mechanism. To test this idea we dispense with the Walrasian description of the labor market and introduce contractual arrangements between employees and emplyers. Assuming that the former are prevented from accessing capital markets and are more risk averse than the latter we use the theory of optimal contracts to derive an equilbrium relation between aggregate states of the economy and wage-labor outcomes. This contractual arrangement is then embedded into a standard one-sector, stochastic neoclassical growth model in order to look at the business cycle implications of the contractual hypothesis. The resulting dynamic equilibrium relations are then parameterized and studied by means of standard numerical approximation techniques. The quantitative properties of our model appear to be somewhat encouraging. We have examined different contractual environments and in all circumstances the contracts-based equilibrium performs better than standard ones with regard to the labor-market variables and at least as well with regard to the other aggregate macroeconomic variables. The present paper reports only the simulation results relative to wconsider the most empirically relevant cases. More results are available from the authors.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1068.
Length: Date of creation: Mar 1994 Date of revision: Handle: RePEc:nwu:cmsems:1068
Contact details of provider: Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014 Phone: 847/491-3527 Fax: 847/491-2530 Email: Web page: http://www.kellogg.northwestern.edu/research/math/ More information through EDIRC
Order Information: Email:
For technical questions regarding this item, or to correct its listing, contact: (Fran Walker).
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.