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Labor Contracts in a Model of Imperfect Competition

  • Chari, V V
  • Jones, Larry E
  • Manuelli, Rodolfo E

We propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory. We say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption. We construct a model where risk-neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract. We numerically compute examples and show that such unemployment occurs for a wide range of parameter values.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 2 (May)
Pages: 358-63

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:2:p:358-63
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  1. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  2. Dale T. Mortensen, 1982. "The Matching Process as a Noncooperative Bargaining Game," NBER Chapters, in: The Economics of Information and Uncertainty, pages 233-258 National Bureau of Economic Research, Inc.
  3. repec:oup:qjecon:v:98:y:1983:i:3:p:107-22 is not listed on IDEAS
  4. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  5. repec:oup:restud:v:53:y:1986:i:5:p:739-54 is not listed on IDEAS
  6. Martin S. Feldstein, 1975. "The Importance of Temporary Layoffs: An Empirical Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 725-745.
  7. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-59, December.
  8. Kahn, Charles M, 1985. "Optimal Severance Pay with Incomplete Information," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 435-51, June.
  9. Green, Jerry & Kahn, Charles M, 1983. "Wage-Employment Contracts," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 173-87, Supplemen.
  10. repec:oup:qjecon:v:98:y:1983:i:3:p:173-87 is not listed on IDEAS
  11. Jones, Larry E & Manuelli, Rodolfo E, 1992. "The Coordination Problem and Equilibrium Theories of Recessions," American Economic Review, American Economic Association, vol. 82(3), pages 451-71, June.
  12. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  13. repec:oup:qjecon:v:103:y:1988:i:3:p:441-63 is not listed on IDEAS
  14. repec:oup:restud:v:50:y:1983:i:1:p:3-35 is not listed on IDEAS
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