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  • Quarterly Journal of Economics

Wage-Employment Contracts

By: Jerry R. Green and Charles M. Kahn
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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.

Keywords

Labor; Wages; Contracts

Citation

Green, Jerry R., and Charles M. Kahn. "Wage-Employment Contracts." Quarterly Journal of Economics 98, Suppl., no. 2 (1983): 173–188.
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About The Author

Jerry R. Green

Negotiation, Organizations & Markets
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  • Assent-maximizing Social Choice By: Katherine A. Baldiga and Jerry R. Green
  • Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms By: Marco Archetti, Francisco Ubeda, Drew Fudenberg, Jerry R. Green, Naomi E. Pierce and Douglas W. Yu
  • Choice-based Measures of Conflict in Preferences By: Katherine Baldiga and Jerry R. Green
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