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Labor-Market Implications of Contracts under Moral Hazard

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  • Kangwoo Park

    (Seoul National University)

Abstract

The optimal contract under moral hazard is embedded in a standard Mortensen-Pissarides matching model. Under standard assumptions, we show that when firms cannot perfectly observe workers' productivity the optimal contract can take the form of a debt contract exhibiting almost a fixed wage along the business cycle. When this contract is embedded in the standard matching model, the calibrated model generates a more stable wage and more volatile employment than the model with Nash bargaining.

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  • Kangwoo Park, 2007. "Labor-Market Implications of Contracts under Moral Hazard," 2007 Meeting Papers 277, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:277
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    References listed on IDEAS

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    1. James Costain & Marcel Jansen, 2010. "Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 782-811, December.

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