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Labor-Market Implications of Contracts under Moral Hazard

  • Kangwoo Park

    (Seoul National University)

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    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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    File URL: https://economicdynamics.org/meetpapers/2007/paper_277.pdf
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    Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 277.

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    Date of creation: 2007
    Handle: RePEc:red:sed007:277
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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    2. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
    3. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
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    7. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 19pages-19p.
    8. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
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    16. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
    17. Merz, Monika, 1999. "Heterogeneous job-matches and the cyclical behavior of labor turnover," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 91-124, February.
    18. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
    19. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
    21. Chang, Yongsung, 2000. "Wages, business cycles, and comparative advantage," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 143-171, August.
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