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Wage-Employment Contracts: Global Results

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  • Jerry R. Green
  • Charles M. Kahn

Abstract

This paper studies the efficient agreements about the dependence of workers' earnings on employment, when the employment level is controlled by firms. The firms ' superior information about profitability conditions is responsible for this form of contract governance. Under plausible assumptions, such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk. It is shown that, if leisure is a normal good and firms are risk neutral, employment is always above the efficient level. Such a one-period implicit contracting model cannot, therefore, be used to "explain" unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information.

Suggested Citation

  • Jerry R. Green & Charles M. Kahn, 1981. "Wage-Employment Contracts: Global Results," NBER Working Papers 0675, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0675
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    1. Hall, Robert E & Lilien, David M, 1979. "Efficient Wage Bargains under Uncertain Supply and Demand," American Economic Review, American Economic Association, vol. 69(5), pages 868-879, December.
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    Cited by:

    1. Edward P. Lazear, 1983. "Pensions as Severance Pay," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 57-90 National Bureau of Economic Research, Inc.
    2. Aba Schwartz, 1982. "The Implicit Contract Model and Labor Markets: A Critique," Discussion Papers 513, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Lazear, Edward P, 1984. "Incentives and Wage Rigidity," American Economic Review, American Economic Association, vol. 74(2), pages 339-344, May.

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