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Unemployment with Observable Aggregate Shocks

  • Maskin, Eric S.
  • Grossman, Sanford J.
  • Hart, Oliver D.

A general equilibrium model of' optimal employment contracts is developed where firms have better information about labor's marginal product than workers. It is optimal for the wage to be tied to the level of employment, to prevent the firm from falsely stating that the marginal product is low and cutting the wage. It is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3448840/Hart_UnemploymentObservableAgg.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3448840.

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Date of creation: 1983
Date of revision:
Publication status: Published in Journal of Political Economy -Chicago-
Handle: RePEc:hrv:faseco:3448840
Contact details of provider: Postal: Littauer Center, Cambridge, MA 02138
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Web page: http://www.economics.harvard.edu/

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  1. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  2. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
  3. repec:nbr:nberre:0126 is not listed on IDEAS
  4. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
  5. Blanchard, Olivier Jean, 1979. "Wage Indexing Rules and the Behavior of the Economy," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 798-815, August.
  6. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(2), pages 171-196.
  7. Holmstrom, Bengt R & Weiss, Laurence, 1985. "Managerial Incentives, Investment, and Aggregate Implications: Scale Effects," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 403-25, July.
  8. Sanford Grossman & Laurence Weiss, 1980. "Heterogeneous Information and the Theory of the Business Cycle," Cowles Foundation Discussion Papers 558, Cowles Foundation for Research in Economics, Yale University.
  9. Dasgupta, Partha S & Hammond, Peter J & Maskin, Eric S, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 185-216, April.
  10. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  11. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  12. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
  13. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(1), pages 171-196.
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