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Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment


  • W. Bentley MacLeod
  • James M. Malcomson


This paper characterizes all outcomes supportable by implicit employment contracts of the most general form when employee's performance is not public information. A strictly positive economic surplus must result from employment, the form of contract depending on how this surplus is divided between firm and employee. In a general equilibrium formulation with more workers than job vacancies, the surplus goes to employed workers giving them strictly higher utility than unemployed workers who are, therefore, involuntarily unemployed. With more job vacancies than workers, the surplus goes to firms with workers, giving them strictly positive profit despite there being unfilled vacancies.

Suggested Citation

  • W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:585

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    References listed on IDEAS

    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    2. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    3. Francois, Patrick & Shi, Shouyong, 1999. "Innovation, Growth, and Welfare-Improving Cycles," Journal of Economic Theory, Elsevier, vol. 85(2), pages 226-257, April.
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    5. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
    6. Douglas Gale, 1996. "Delay and Cycles," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 169-198.
    7. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
    8. Patrick Francois & Huw Lloyd-Ellis, 2009. "Schumpeterian Business Cycles with Pro-Cyclical R&D," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 567-591, October.
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