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A model of implicit contracts without precommitment on emloyment

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  • Mikko Puhakka

    (Helsinki School of Economics)

Abstract

The purpose of this paper is to analyze an optimal one-period labor contract between one firm and one worker when there is no precommitment on employment. I assume, instead, that implementation is the responsibility of a third party (e.g. court of law) that observes only the wage rate and the state of nature. Under these informational assumptions the first-best contract is no longer attainable even though the state is publicly observed. It is demonstrated in this paper that (i) either the worker or the firm is rationed in every state of nature, except possibly in one state; (ii) the firm is rationed in low states; (iii) the contract stipulates the wage rate and the employment level to be increasing functions of the state whenever the firm is rationed.

Suggested Citation

  • Mikko Puhakka, 1989. "A model of implicit contracts without precommitment on emloyment," Finnish Economic Papers, Finnish Economic Association, vol. 2(2), pages 106-115, Autumn.
    • Handle: RePEc:fep:journl:v:2:y:1989:i:2:p:
    as

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    References listed on IDEAS

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    1. J. E. Spingarn & R. T. Rockafellar, 1979. "The Generic Nature of Optimality Conditions in Nonlinear Programming," Mathematics of Operations Research, INFORMS, vol. 4(4), pages 425-430, November.
    2. Oliver D. Hart, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(1), pages 3-35.
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