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- Title
Implicit Contracts, Moral Hazard, and Unemployment.
- Authors
Grossman, Sanford J.; Hart, Oliver D.
- Abstract
One reason for studying implicit contract models is the vague empirical observation that workers are sometimes laid off in states in which their marginal product exceeds their reservation wage. This suggests that the conditions for ex post productive efficiency are not always met, which in turn raises the possibility that equilibrium is not brought about by the clearing of spot demands and supplies. The earliest implicit contract models assumed no moral hazard, so there was no tradeoff between insurance and ex post efficiency. In models where the risk faced by the firm is purely idiosyncratic and diversifiable, the firm completely insures the worker by giving him a constant wage. This means the firm has no incentive to lie about the state of the world. Authors have assumed that the level of employment is the only public variable on which the wage can be conditioned. Then the only way to get the right degree of risk sharing is to have "excessive" employment variations. As a result, there will be more unemployment when information is asymmetric than would occur with spot markets or in the absence of moral hazard.
- Subjects
UNEMPLOYMENT; ECONOMIC equilibrium; PRODUCTION (Economic theory); EMPLOYEES; EMPLOYERS; ECONOMICS
- Publication
American Economic Review, 1981, Vol 71, Issue 2, p301
- ISSN
0002-8282
- Publication type
Article