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Labor contracts in a model of imperfect competition

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

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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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 117.

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Date of creation: 1989
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Handle: RePEc:fip:fedmsr:117
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  1. 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.
  2. Chari, V V, 1983. "Involuntary Unemployment and Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 107-22, Supplemen.
  3. Hart, Oliver D, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 3-35, January.
  4. Kahn, Charles M. & Green, Jerry, 1983. "Wage-Employment Contracts," Scholarly Articles 3203642, Harvard University Department of Economics.
  5. Dale T. Mortensen, 1979. "The Matching Process as a Non-Cooperative/Bargaining Game," Discussion Papers 384, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Mookherjee, Dilip, 1986. "Involuntary Unemployment and Worker Moral Hazard," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 739-54, October.
  7. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  8. 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.
  9. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. 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.
  11. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  12. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-59, December.
  13. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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