some macroeconomic implications of alternative compensation systems a basic theme of this paper is the idea that some structural reform of employee compensation arrangements is necessary to make reasonable price stability compatible with reasonably full employment in this view even the best designed macroeconomic policies are much too aggregative to get at the heart of the stagflation problem the ultimate solution involves going inside the workings of a modern capitalist economy and correcting the underlying structural flaw directly on the level of the individual firm stagflation represents an especially intractable policy dilemma for macroeconomics without a decisive tendency of the economic system to remain near full employment there is a strong prima facie case for fighting recessions by exogenously stimulating aggregate demand but the usual keynesian expansionary policies tend to impart an inflationary inertia that is difficult to choke off and of course the basic strategy for fighting inflation is to cool down the economy by restrictive monetary and fiscal policy thereby increasing unemployment and closing the viscous circle because the practical macroeconomic policies for dealing with unemployment and inflation are so diametrically opposed stagflation is a pervasive structural problem when for whatever reason there is basically an unfavourable short run tradeoff between unemployment and inflation economic policy tends to vacillate between expansion of demand to fight unemployment and restriction of demand to fight inflation polarising the electorate and distracting society from dealing effectively with its underlying real economic problems even the difficulty of attaining external balance in foreign accounts is largely a spillover into the international payments arena of an inability to achieve an acceptable internal balance between full employment and price stability this paper takes what might be called a comparative systems approach to the problem of stagflation at the heart of modern industrial capitalism is an incredibly complicated system of overlapping monopolistic competitors 2 a starting point for the paper is the realisation that the coordination difficulty which can cause some systems to suffer involuntary unemployment is not inherent in laissez faire private enterprise per se it is closely tied to one particular property of a conventional wage payment system namely compensation of each firm s employees is stuck to an outside numeraire whether money or a cost of

asymmetric information and middleman margins an experiment with indian potato farmers west bengal potato farmers cannot directly access wholesale markets and do not knowwholesale prices local middlemen earn large margins pass through from wholesale to farmgate prices is negligible when we informed farmers in randomly chosen villages about wholesale prices average farmgate sales and prices were unaffected but pass through to farmgate prices increased these results can be explained by a model where farmers bargain ex post with village middlemen with the outside option of selling to middlemen outside the village they are inconsistent with standard oligopolistic models of pass through search frictions or risk sharing contracts

wage employment contracts 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

strategic labour contracts labor contracts affect a firm s cost function and for this reason they can be used as a recommitment device to gain a strategic advantage against other firms in a model that is otherwise neutral it is found that if firms compete in prices then strategic considerations alone yield results similar to those obtained by c azariadis 1983 workers are underemployed and worse off in more adverse states of nature on the other hand if firms compete in quantities then the equilibrium contracts resemble those of j green and c kahn 1983 workers are overemployed and better off in more adverse states

mitigating the pro cyclicality of basel ii policy discussions on the recent financial crisis feature widespread calls to address the pro cyclical effects of regulation the main concern is that the new risk sensitive bank capital regulation basel ii may amplify business cycle fluctuations this paper compares the leading alternative procedures that have been proposed to mitigate this problem we estimate a model of the probabilities of default pds of spanish firms during the period 1987 2008 and use the estimated pds to compute the corresponding series of basel ii capital requirements per unit of loans these requirements move significantly along the business cycle ranging from 7 6 in 2006 to 11 9 in 1993 the comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the hodrick prescott trend of the original series the results show that the best procedures are either to smooth the input of the basel ii formula by using through the cycle pds or to smooth the output with a multiplier based on gdp growth our discussion concludes that the latter is better in terms of simplicity transparency and consistency with banks risk pricing and risk management systems for the portfolio of spanish commercial and industrial loans and a 45 loss given default lgd the multiplier would amount to a 6 5 surcharge for each standard deviation in gdp growth the surcharge would be significantly higher with cyclically varying lgds rafael repullo jesus saurina and carlos trucharte

the dynamics of monopoly union wages with asymmetric information dunlop s 1994 work on the monopoly union model emphasizes that the primary role of wages is to distribute industry rents this paper extends the model to two periods and it is furthermore assumed that firms are better informed than workers about the size or quality of capital this variable is unchanged over time so the firm s first period action signals information relevant for the second period wage this dynamic relationship tends to lower labour demand in the first period

unions and strikes with asymmetric information strikes seem to be a pareto inefficient outcome of bargaining between a union and a firm however this paper shows that strikes can be the outcome of rational behavior by both agents if the firm has more information than the union concerning the state of nature the union can use strikes as a way of gaining information the paper uses an asymmetric information model where the firm has information about the state i e profitability that the union does not know the schedule of wage offers by the union then depends on the probability that a given state will occur

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

exchange rate and wage price dynamics a theoretical analysis and an econometric investigation abstract this paper is an attempt to analyze inflation dynamics in a small open economy as the result of the interaction between wage and price determination behaviors and the interest rate exchange rate feedback in the context of dornbusch s model an extended version of this model is specified and analyzed formally then the model is estimated for five oecd countries using a full information maximum likelihood technique finally simulations of the effect of monetary shocks are presented for four countries

bumping layoffs and worksharing this paper deals with an interesting but often neglected labor practice prevalent in large north american firms with well developed internal labor markets large north american firms typically respond to a decline in demand for their products by first reducing the number of hours worked or worksharing as the demand continues to fall however they begin to make skilled workers bump onto unskilled jobs displacing unskilled workers skilled workers are laid off only after a considerable number have bumped i develop an implicit contract model and explain the practice

on managerial contracting with asymmetric information abstract this paper deals with asymmetric information in a two period principal agent model where the agent makes investment decisions after observing a private signal we study the case where the current employer has more information than other prospect employers and the case where the private information is not verifiable by the current employer we analyze the effect of these asymmetries on the wage contracts as well as their interplay

involuntary employment in contracts with risky job search involuntary employment in contracts with risky job search the implications of partially insurable job search risk for incentive compatibility in a standard contracting framework are explored when unemployment spells provoke job search workers face risk in spell duration and reemployment wages when search effort is not variable contracts including unemployment insurance will yield involuntary employment when search effort is diminished by ui benefits firms shift some compensation back to wages increasing the relative attractiveness of employment the analysis begins with a theorem on incomplete insurance by imai geanakoplos and ito 1981 for which a simple proof and economic intuition are provided i introduction in seminal models of contingent labor contracts azariadis 1975 and baily 1974 sought to explain the behavior of wages and employment over the business cycle much of the subsequent literature for example grossman and hart 1983 and hart 1983 has been devoted to exploring the impact of asymmetric information on such properties of contracting equilibria as over or underemployment wage flexibility and whether or not utility falls when a worker is fired this paper looks at the effects on contingent labor contracts of the asymmetry in risk faced on the one hand by workers who being laid off when the contract is implemented experience job search risk which is partially uninsured due to asymmetric information and on the other hand by workers who retaining their jobs return to a known status quo for the rest of the period in most contingent contracting models all relevant information about the prevailing state of nature is revealed at once and wage and employment levels are then determined once the contract is implemented there is no residual uncertainty this sequence of events agreement upon a contingent contract resolution of uncertainty determination of wages and employment is a reasonable approximation to the experience of workers who retain their jobs since they know their wages and their working conditions workers who are laid off however often face considerable risk over the effectiveness of job search and the terms of future employment this creates an asymmetry in the riskiness of the ex post outcomes of the contract job retention means no more uncertainty within the period while layoff entails further within period risk associated with job search and reemployment while severance pay or unemployment benefits can reduce some of the uncertainty associated with job loss they will not generally provide complete insurance this is because the intensity of job search and the arrival of job offers are private information since the firm cannot verify for example the intensity of job search it will insist that the worker bear some of the risk associated with the search s outcome this is a standard principal agent problem see for example shavell 1979 equilibrium labor contracts will therefore offer workers a gamble between job retention with no residual risk and layoff with some uninsured job search risk 1 this asymmetry in residual risk affects the contingent contracts workers enter into for example if workers feel more comfortable facing a given risk when their incomes are higher the residual risk associated with layoff may lead them to accept lower contingent wages in the employed state in exchange for greater severance pay when laid off a problem with this kind of modification of the standard contract i e one with no residual risk is that if enough compensation is shifted into the unemployed state expected utility may actually be higher for laid off workers than for those who are retained this is a situation with voluntary layoffs and involuntary employment at prevailing wages retained workers would rather be laid off if workers can increase their chances of being fired by behaving unproductively involuntary employment contracts may be unenforceable

golden cages for showy birds optimal switching costs in labor contracts under what circumstances do workers sign contracts with high quitting penalties our answer points to market transparency when the worker s performance is privately observed by the incumbent 4rm alternative employers face an adverse selection problem as a result e7cient separations can only take place through involuntary layo8s and there is no role for quitting fees in contrast when performance is public quitting fees are useful devices to appropriate the surplus from workers reallocation separations are amicable and take the form of quitting after downwardly renegotiating the fees qualitative features of contracts are independent of the distribution of ex post bargaining power the impact of switching costs on total welfare and its distribution depends on the degree of market transparency and the ex ante distribution of market power c

unemployment insurance and labor contracts under asymmetric information theory and facts the paper provides evidence to show that many u s labor contracts havelittle or no private unemployment insurance provision a model of an optional contract under asymmetric information with no private unemployment insurance is presented underemployment and involuntaryunemployment may coexist copyright 1986 by american economic association

pay and employment determination in britain what are labour contracts really like the recent growth of unemployment in western economies has prompted new research on the workings of the labour market there has been much interest in particular in the questions what determines the level of real pay and why is it apparently so insensitive to changes in aggregate demand and unemployment european economists now find it hard to take seriously the notion still taught to many undergraduate that wages are determined by the intersection of demand and supply curves roughly half of all british employees belong to trade unions a much higher percentage have their pay fixed by some kind of collective bargain in this country it is negotiations not impersonal com petitive markets which decide what most of us will be paid the difficult problem is that of how to understand this process or to put it differently of how to think up the right model of the world

annual bonuses employment and productivity change in taiwan s manufacturing sector abstract taiwanese manufacturing firms have traditionally made annual bonus payments to employees concentrated around the lunar new year holiday this paper uses industry data to investigate the connection between compensation volatility and the volatility and growth rate of employment we observe a significant relationship between employment and seasonally predictable compensation volatility implying that industries in which firms commit themselves to paying regular new year bonuses employ more workers more stably we also investigate the relationship between compensation profits and productivity growth we find a significant role for productivity growth in the determination of profits and for profits in the determination of bonuses however it appears that productivity growth itself is mainly determined by exogenous factors and is only slightly responsive to the bonus system

contracting with endogenous entry we analyze entry in markets where a principal contracts with a privately informed agent before learning his production cost the agent knows his probability of having a low cost his ex ante type and decides whether to pay an entry fee to contract with the principal there are two cut off equilibria that determine the possible types of an agent who actually enters the market and neither equilibrium can be discarded by standard selection criteria contrasting with standard intuition in the equilibrium with the highest cut off an increase in the entry fee reduces the marginal type of the agent who enters thus increasing entry and the expected cost of an entrant this equilibrium is selected by a criterion based on robustness to equilibrium risk even though the equilibrium with the lowest cut off is pareto dominant for the agent public policies that increase entry barriers may be welfare improving

wage rigidity implicit contracts unemployment and economic efficiency standard implicit contract theory can explain wage rigidity but not unemployment and pays insufficient attention to the general equilibrium aspects and constraints limiting the set of feasible contracts implicit contracts must specify an enforcement mechanism can only be conditional on observable information and must be of limited complexity without these restrictions contracts generate full employment which is constrained inefficient natural restrictions on enforceability or complexity alone do not produce unemployment though limited observability may with two or more restrictions unemployment may result specifically periodic unemployment can arise if contracts are of limited complexity and cannot be enforced through third parties copyright 1987 by royal economic society

implicit contracts in the japanese bank loan market the implicit contract theory explored by azariadis 2 suggests that wage rigidity and underemployment are explained by the microeconomic optimizing behavior of each agent in the labor market in this theory the former phenomenon is interpreted as risk sharing arrangements between firms and workers whereas the latter may occur when workers have the opportunity to use leisure or unemployment insurance benefits

contractual contingencies and renegotiation in a dynamic model of asymmetric information between the owner of a firm and a manager we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible in particular we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor thereby limiting the contractible contingencies our findings thus provide an endogenous explanation for contract simplicity in contrast to those based on transactions costs or bounded rationality

optimal allocation of mri scan capacity among competitive medical departments we consider an mri scanning facility run by a radiology department with limited capacity several medical departments compete for capacity and have private information regarding their demand for scans the fairness of the capacity allocation by the radiology department depends on the quality of the information provided by the medical departments we employ a generic bayesian game approach that stimulates the disclosure of true demand truth telling so that capacity can be allocated fairly we derive conditions under which truth telling is a bayesian nash equilibrium the usefulness of the approach is illustrated with a case study

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

efficient labor contracts with employment risk this article analyzes efficient employment agreements where the demand for consumption insurance can be satisfied by noncontractual means we assume that workers can save and that consumption is determined by a strong form of the permanent income hypothesis under conditions of asymmetric information about exogenous shocks to labor demand we derive a unique compensation schedule that efficiently guides decisions by both workers and employers efficient employment outcomes are generated without a need for third party enforcement or monitoring and workers choose a consumption policy that leaves them indifferent among realizations of labor demand within this solution it is both costless and efficient for workers to delegate employment decisions to the firm within the context of the model we analyze implications for the equilibrium distribution of wages and for empirical studies of labor supply

efficient bargains and the mcdonald solow conjecture this article explores the mcdonald and solow 1981 conjecture that the outcome from a bargain over wages and employment can be approximately achieved by a bargain over wages and the labor capital ratio the crew size where the latter can be argued to be more representative of the real world i derive a crew size contract curve and show that this conjecture is not generally true a test to determine which model is generating real world data is suggested the wage rigidity results derived by mcdonald and solow for their contract curve do not apply to this crew size contract curve

the life cycle of worker owned firms in market economies a theoretical analysis abstract the population of worker owned firms is likely to grow countercyclically in contrast with capitalist firms many worker owned firms are born during recessions frequently out of capitalist firms and are transformed into capitalist firms during economic booms there exists an offsetting tendency as worker owned firms are formed during periods of sustained increase in the standard of living and are dissolved during economic decline these are some of the conclusions of a theoretical analysis of the obstacles to the formation and relative efficiency attributes of worker owned and capitalist firms carried out in a dynamic framework emphasizing the influence of changes in the environment on organizational life cycles

islamic economics the emergence of a new paradigm the authors illustrate the potential impact of the islamic doctrine on western economic relationships by focusing on the prohibition of interest riba in islamic economics they show that the alternate method of financier remuneration i e mudarabah profit and loss sharing will under certain conditions enhance capital investment on account of its ability to act as an efficient revelation device by applying ideas developed in the western contract literature the authors show that a mudarabah contract between the manager of a project and a syndicate of investors may permit a more efficient revelation of any informational asymmetries between the two copyright 1994 by royal economic society

providing business information to production workers correlates of compensation and profitability this study investigates some of the effects of a company s providing production workers with information on its financial condition productivity and relative standing in the labor market analyzi

a nonuniform pricing model of union wages and employment unlike implicit contracts models the nonuniform pricing model of unions assumes that firms can always shut down ex post to avoid any payments to the union under this restriction employment can differ from a first best even if both workers and firms are risk neutral in general the union chooses to offer quantity discounts on labor and needs to use a seniority rule that regulates the order in which workers are hired to implement these discounts unions lower almost all workers employment probabilities and increase the cyclical volatility of employment and the union nonunion average wage differential will move countercyclically workers preferences over union wage profiles conditional on their seniority exhibit within limits a convenient unanimity property

contract form wage flexibility and employment we begin with two uncontroversial hypotheses firm productivity is expensive to measure and employment entails relationship specific investments these assumptions imply that firms would optimally choose fixed wage contracts and complement these with bonus pay when measuring employee performance is not too costly these assumptions imply that under an optimal employment contract hours of work is less responsive while total compensation is more responsive to shocks under bonus pay contracts compared to fixed wage contracts using data from the panel study of income dynamics psid where shocks are proxied using the local unemployment rate we find strong support for these two implications

explanations of unemployment economists commonly distinguish between two sorts of unemployment roughly speak ing the involuntarily unemployed workers are unwillingly out of work i e they feel that they would be better off with jobs on the other hand the voluntarily unemployed workers prefer to be out of work for any of a wide variety of reasons e g because they are searching or training for a job or because they choose leisure over work

contributions of oliver hart and bengt holmstrom to contract theory oliver hart and bengt holmstrom were awarded the 2016 sveriges riksbank prize in economic sciences in memory of alfred nobel for their fundamental contributions to contract theory this article offers a short summary and discussion of their path breaking work

employment contracts job search theory and labour turnover preliminary empirical results summary the empirical implications of a model in which a worker participates in a labour market in which a job offer consists of a wage hour pair are examined here hours are not freely adjustable and the wage rate is typically different from the marginal value of leisure a theoretical model is proposed some natural conjectures on effects of wage changes are shown not to hold and a preliminary empirical investigation based on denver income maintenance experiment data is undertaken the persistence of business cycles has led economists to consider explicitly potential sources of stickiness in wage and price adjustments particularly stickiness of nominal wages one explanation of slow adjustments of wages to shocks is that information arrives too rapidly with too much volatility or too much asymmetry for workers wages and hours to adjust so that the worker s wage is always equal to the value of his marginal product of labour and simultaneously to his marginal value of leisure time to avoid continuous adjustment workers and firms engage in implicit or explicit employment contracts azariadis 1975 modelled underemployment equilibria in a model with contracts baily 1977 studied a model in which certain fixed costs induce layoffs as firms respond to demand fluctuations more recent work by burdett and mortensen 1980 has considered the terms of equilibrium contracts in the labour market hart 1983 reviews the theory of optimal employment contracts emphasizing the role of asymmetric information fischer 1977a and implicitly phelps and taylor 1977 considered the effects of multiperiod contracts in dynamic macroeconomic models and found that certain policy neutrality results of the new classical macroeconomics could be invalidated under certain conditions it is worth mentioning at this point that keynes clearly recognized that the link between the real wage paid to workers and the value of their leisure time had to be broken before macropolicy of the keynesian type would be effective indeed keynesian macroeconomic problems arise because this link is broken keynes repeatedly refers to nominal wage bargains as providing the rigidity he wanted to model the importance of implicit or explicit employment agreements in economic theory has led to a small number of empirical studies which explicitly allow for divergence between the wage keynes 1936 ch 2 and 18 malinvaud 1977 provides a related discussion in some models contracts serve only to introduce a somewhat arbitrary rigidity barro 1977 notes that rational agents are unlikely to write contracts the provisions of which make all parties worse off see also the comment by fischer 1977b

labor and credit contracts with asymmetric information and bankruptcy abstract this paper investigates the interaction between a firm s contracts for labor and its contracts for credit under asymmetric information and limited liability when workers are either always committed to their contract or they lack the power to commit ex post because arbitrage opportunities are available to them the analysis contains two main results first contrary to the perceptions of the limited liability literature where limited liability is thought of causing both underemployment and income underinsurance limited liability is in fact shown to only cause underemployment existence of outside sources of credit eliminates the underinsurance side of the inefficiency but can not eliminate underemployment second the factor that does cause underinsurance is the existence of ex post arbitrage opportunities for the worker worker mobility leads to underinsurance regardless of whether limited liability is binding or not and even if outside sources of credit exist thus underemployment stems from limited liability and underinsurance stems from worker mobility

commitment through renegotiation proof contracts with third parties the paper analyzes contracts as means of strategic commitment that is commitment against outside parties to the agreement it considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry it assumes away the possibility for the parties to precommit not to make pareto improving renegotiations of the agreement once entry has taken place under symmetric information the contract is thus found to be useless for entry deterrence if the incumbent firm or workers possess some private information excessive post entry production levels can however be sustained ex post since output reductions may not be incentive compatible while information asymmetries are usually welfare decreasing when the goal is optimal risk sharing they can thus be welfare improving for the contracting parties when commitment against outsiders is the goal of the contract the role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper and the general relevance of strategic contractual commitment is discussed

keynesian issues and economic theory recent research helped in clarifying the nature of short run price and quantity adjustments in keynesian macroeconomic models and the possible causes of a persistent excess labour supply it is argued however that theories involving imperfect competition and real wage rigidities generate classical unemployment where multipliers act through supply side effects while nominal inertia seems to be at the root of truly keynesian multipliers the appraisal also contains a nontechnical presentation of recent models of endogenous expectations driven business fluctuations cycles sunspots monetary policy can then have persistent real effects under complete information money as a sunspot

unemployment insurance and involuntary unemployment the case of adverse selection abstract this paper studies the private and public provision of unemployment insurance in a model where equilibrium unemployment results from the use of the wage as a worker selection device it is shown that private provision will not occur essentially because those workers most desired by a firm place least value on such coverage respecting the same informational constraints public provision necessarily gives rise to some distortions in participation decisions but nonetheless is welfare improving in the aggregate

credit rationing and implicit contract theory an empirical study abstract this paper investigate whether or not implicit contract relations predominate in the japanese bank loan market and produce equilibrium credit rationing the empirical evidence suggests that risks are shared between banks and firms through interest rate arrangements this implies that commercial banks in japan operate in a market dominated by implicit contract relations however the evidence does not support the view that japanese commercial banks execute credit rationing in the sense of fried and howitt 1980 furthermore the results show that large banks differ from small banks in the risk consideration of loan contracts these empirical results are completely consistent with the intermarket business group hypothesis such that the group formation aims to share risks and profits among members

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

implicit contracts with asymmetric information and bankruptcy the effect of interest rates on layoffs this paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors firms have more information than do the owners of the factors of production and they are also subject to limited liability we show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information the firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined we show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates recent literature in the area of implicit contracts has shown considerable interest in the assumption of asymmetric information henceforth a i papers by azariadis 1982 green and kahn 1982 and grossman and hart 1981 have all shown that a i will interfere with optimal risk sharing but although these models produce non walrasian outcomes it is not clear that they are capable of explaining the observed variations in employment over the business cycle in the absence of a link between the level of employment and other macroeconomic variables these new versions of contract theory are open to the charge that they are presenting a complicated explanation of frictional unemployment one potential link between variations in output and variations in intertemporal prices is suggested by models which explicitly allow for the possibility of bankruptcy sappington 1983 has shown that bankruptcy will generate inefficient outcomes even between risk neutral agents and farmer 1984 has shown that if sappington type contracts are incorporated into a macroeconomic structure then the resulting model predicts that bankruptcies will vary countercyclically over the business cycle although bankruptcy is important however it is unlikely that bankruptcies alone will account for all of the output loss during a recession the purpose of this paper is to show that the assumptions of a i and limited liability will generate a model in which the employment level is inefficient and in which the magnitude of this inefficiency varies systematically with the expected real rate of interest this model predicts that the observed increase in the incidence of layoffs during recessions is directly attributable to the effects of high interest rates on aggregate supply some evidence of the phenomenon to be explained is presented below

optimal labour contracts and involuntary unemployment under costly and imperfect monitoring this paper provides an explanation for the concurrence of rigid wages and involuntary unemployment we consider cases in which a firm monitors its workers but at some cost a key assumption in the model is that the firm cannot perfectly distinguish shirkers from nonshirkers thus the firm has to rely on negotiated compensation and work effort as well as monitoring to reduce the incentive to shirk we find that rigid wages and involuntary unemployment arise simultaneously when monitoring costs are large and the effectiveness of monitoring is low

trade unions and optimal labour contracts the recently revived literature on wage and employment determination under trade unionism has in our opinion contributed important insights into the functioning of especially european labour markets it suffers however from a potentially serious deficiency with a few exceptions it neglects completely the issue of risk shifting between workers and employers 3 in particular it disregards entirely the possibility of such risk shifting in economies characterized by more or less encompassing trade unions and centralized wage setting as e g the scandinavian countries the netherlands and austria a typical feature of trade unions in these countries is that they are not only concerned with wage setting but strive in various ways to increase their member s welfare at the expense of the employers by reducing their members exposure to risk for instance unions demand limits to the employers right to require overtime or co lay off workers or they demand occupational safety rules work injury insurance health insurance etc an actual employment contract hence not only entitles the worker to a certain wage and the employer to a certain number of working ho urs in return but is really a package of rights and responsibilities for both parties increases in the amount of insurance such a package provides are sometimes explicitly declared to be obtained through foregone wage increases while risk shifting hence is of prime importance to real world unions the formal trade union literature is almost entirely concerned with wage and employment setting under certainty

information and economic analysis a perspective ten years ago i delivered a paper before this group with the title information and economic analysis i chose the title deliberately i did not call the subject on which i was speaking the economics of information because to do so would have been to suggest that my topic like the economics of agriculture or the economics of industry or the economics of labour represented another branch of specialisation within economics i wanted to suggest that informational considerations were in fact central to the analysis of a wide variety of phenomena that they constituted a central part of the foundations of economic analysis at the time though economists had long paid lip service to the importance of information there was little formal literature the last decade has seen a burgeoning of the literature it has become to the late 7o s and early 8o s what growth theory was to the early 6o s and it has been greeted with some of the same scepticism there seems to be a myriad ofspecial cases and few general principles the little examples are often contrasted unfavourably with the generality of general equilibrium theory what have we learned have diminishing returns set in are there fruitful directions for future research and if so what are they these are the questions which i wish to address here the work of the past decade has made i think a fundamental and lasting contribution to economic analysis the contributions have been both negative and positive we have learned that much of what we believed before is of only limited validity that the traditional competitive equilibrium analysis though having the superficial appearance of generality in terms of superscripts and subscripts is indeed not very general the theory is not robust to slight alterations in the informational assumptions it is but a special and not very plausible example among the possible set of informational assumptions which can be employed to characterise an economy at the same time the theory has been able to provide insights into phenomena about which the traditional model had nothing to say or which seemed inconsistent or inexplicable within the competitive paradigm it has provided some of the micro foundations for macro economics it has provided the basis of a new theory of the firm of a new new welfare economics and of a theory of economic organisation including a comparison of economic

urbanization and economic development a bias toward large cities abstract we find that a nation s urban population percentage increases with gdp per capita industrialization export orientation and possibly foreign assistance it decreases with the importance of agriculture industrialization and agricultural importance have the same implications for the concentration of urban population in cities with 100 000 population as for the urban percentage greater export orientation reduces such concentration finally gdp per capita population and export orientation reduce primacy political factors such as whether a country s largest city is also its capital affect primacy our results do not seem to imply that developing country urbanization today differs fundamentally from urbanization in the past

coordination and discrimination in contracting with externalities divide and conquer abstract the paper studies bilateral contracting between n agents and one principal whose trade with each agent generates externalities on other agents it examines the effects of prohibiting the principal from i coordinating agents on her preferred equilibrium and ii making different contracts available to different agents these effects depend on whether an agent is more or less eager to trade when others trade more the prohibitions reduce the aggregate trade in the former case and have little or no effect in the latter case the inefficiencies under different contracting regimes are linked to the sign of the relevant externalities and are shown to be typically reduced by both prohibitions

labor contracts with voluntary quits this paper considers labor contracts between the risk neutral firm and risk averse workers with heterogeneous outside opportunities alternative wages which become known to the worker after a costly on the job search in the case of a deterministic alternative wage self selection over a menu of contract wages would achieve the first best contract if the alternative wages are stochastic the second best contract emerges as a trade off between productive efficiency and risk sharing workers who voluntarily search are fewer and workers who search are less likely to quit if the search effort is not monitored even fewer workers search

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

the procyclical effects of bank capital regulation we assess the procyclical effects of bank capital regulation in a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and as a precaution hold capital buffers we find that under cyclically varying risk based capital requirements e g basel ii banks hold larger buffers in expansions than in recessions yet these buffers are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession we show that cyclical adjustments in the confidence level underlying basel ii can reduce its procyclical effects on the supply of credit without compromising banks long run solvency targets

on the incidence of profit and equity sharing theory and an application to the high tech sector abstract profit and equity sharing benefit some firms through improvements in innovation production quality retention of key employees and specific human capital formation the analysis predicts high share contract incidence in the high tech sector a hypothesis supported by survey data collected from small and large high tech firms however externalities associated with this sector s market entry mechanism imply that the optimal level of profit and equity sharing may not have been achieved

asymmetric information bargaining and unemployment fluctuations we construct a dynamic general equilibrium model where wages are determined by bilateral bargaining and the firm has superior information the asymmetry of information introduces unemployment fluctuations and dynamic wage sluggishness because the information of the firm is only revealed gradually wages fall slowly in response to a negative shock and unemployment exhibits additional persistence it is shown that high job destruction will generally be followed by a period of higher than average job destruction that the presence of common shocks introduces an informational externality and that bargaining is an inefficient method of wage determination as compared to implicit contracts

insiders and outsiders and efficient asymmetric information contracts abstract the employment levels implied by an efficient contract with asymmetric information are shown to deviate from walrasian levels if a distinction if drawn between insiders and outsiders if insiders alone negotiate the contract there will be over employment for low levels of demand and there may be either over or under employment for high levels

dynamic contractual enforcement a model of strikes this paper provides a theory of strikes as part of a constrained efficient enforcement mechanism for an implicit contractual agreement a firm possessing contemporaneously private information about demand engages in an enduring relationship with its workforce if the information becomes perfectly observable subsequently then modulo discounting the first best is implementable but strikes are always off the equilibrium path if the observations of the workforce are imperfect strikes occur in equilibrium the dynamic contracting problem is modeled as a repeated game with imperfect monitoring the equilibrium exhibits production inefficiency and incomplete insurance to mitigate the inefficiencies caused by strikes

wages effort and incentive compatibility in life cycle employment contracts existing models of incentive compatibility in life cycle employment contracts arrive at different predictions partly because of the different kinds of contract breaking behavior allowed in them this paper sets out and classifies the full range of such behaviors argues that no model has yet incorporated all of them and examines the consequences of doing so in the context of lazear s well known model in the extended model wages cannot rise faster than marginal products throughout the entire contract and the set of feasible contracts can often be empty even when both parties can commit to terminate the contract whenever it is broken by the other party

do trade unions reduce job opportunities of non members this paper examines the structure of the optimal contract that would be chosen by a self interested trade union that represents the interests of some set of m members when it is assumed that there exists a pool of unemployed workers outside the union whose opportunity cost of working is such that they would at least in some states of demand have been employed in a competitive labor market the authors compare wage and employment levels under such a contract with those that would be observed in competitive markets in particular focusing on the impact of the union on the employment opportunities and welfare of non union members copyright 1989 by royal economic society

nominal wage price rigidity as a rational expectations equilibrium most recent studies of macroeconomic behavior fall into one of two categories the first often called the equilibrium business cycle approach stems from the fundamental contribution of robert e lucas 1972 and related work by thomas sargent and neil wallace 1975 and many others these studies espouse the view that a positive correlation between output and the stock of paper assets can arise if households are unable to identify the source and therefore the permanence of price movements employment and output responses in this view are driven by the intertemporal substitution effect especially the substitution of current leisure for future consumption since cyclical fluctuations in employment are large relative to the corresponding real wage movements substantial wage elasticity of labor supply is required to validate these models the equilibrium approach to business cycles implies certain restrictions on the conduct of monetary policy in particular rational expectations undermine the ability of the monetary authority to influence economic activity in a systematic manner see sargent wallace for an example sticky wages and prices are the cornerstone of an alternative description of macroeconomic behavior rooted vaguely in keynes and more firmly in the dual decision hypothesis of robert clower 1984 this approach studies equilibria with quantity rationing see edmond malinvaud 1977 the rationing story lacks a precise specification of the source of price stickiness offering very little guidance about the eventual causes of price change considerable efforts were made in the 1970 s to fill this lacuna in keynesian macroeconomics beginning with work by martin n baily 1974 and others the implicit contracts literature focused on the incomplete insurability of human capital unable to find insurance against fluctuations in labor income elsewhere workers demand insurance from those best placed to observe labor income their own employers both wage inflexibility and layoffs then can be viewed as an outcome of a joint insurance employment relationship between workers and firms see azariadis 1975 critics like george akerlof and hajime miyazaki 1980 soon discovered that the original contracting models could not produce layoffs without prohibiting severance pay or otherwise limiting the terms of the contract others pointed out that these models were determinedly microeconomic offering few insights into the stickiness of nominal wages or the effectiveness of stabilization policy two quite distinct lines of research developed out of the original implicit contract ideas one focuses on asymmetric information and implementability see the qje 1983 symposium for original work and the review article by oliver hart 1983 as a means of driving a wedge between the ex post marginal rates of substitution of the contractants under some technical assumptions the outcome is involuntary underemployment or unemployment we are most concerned here with the other line of research which sought to fit labor or tdiscussants guillermo calvo columbia university jo anna gray washington state university

wage secrecy as a social convention there is a time to keep silent and a time to speak out ecclesiastes 3 7 ask anyone who works for a living how much money he or she makes and you are likely to encounter a range of responses from evasion to outright hostility such responses however should not be surprising according to organizational etiquette it is considered gauche to ask others their salaries in a study at e i du pont de nemours all employees were asked if the company should disclose more payroll information so that everyone would know everyone else s pay only 18 voted for an open pay system dolan and schuler 1987 315 m any organizations have strict policies and norms about the secrecy of pay it is seen as inappropriate in most companies for employees to talk about what they earn and data are rarely given out even internally on salaries some organizations even fire individuals who release salary data this is one way to make it very clear that the organization means it when it says it believes in pay secrecy lawler 1990 239 t he issue of openness or secrecy in the communication of compensation information is one of the most important issues facing senior management henderson 1985 379 i introduction despite the general belief that a free flow of information enhances efficiency social convention appears to call for secrecy regarding individuals wages this paper provides an explanation for this convention we suggest that the role of wage secrecy is to reduce effective labor mobility and thereby enhance the feasibility of risk shifting contracts wage secrecy may yield a mix of mobility and risk shifting that is superior both to a spot market for labor and to a social convention that binds workers to their employers in promising to pay a worker a pre agreed wage rate labor contracts shift uncertainty from workers to employers and provide workers with insurance in particular if workers are risk averse and firms are risk neutral such contracts may enhance the welfare of workers without imposing a cost on firms since a risk shifting contract shields workers from the vicissitudes of the market wage rates need not equal the marginal product of labor in good outcomes workers pay the firm an insurance premium by accepting a wage rate that is lower than their marginal product in bad outcomes workers collect on their insurance policy earning a wage rate that exceeds their marginal product 1 if workers can move freely from one firm to another however risk shifting labor contracts may not be feasible given such freedom of movement workers will stay with their firm if the wage rate exceeds that offered elsewhere and move if they can obtain a higher wage rate in another firm hence without restrictions on labor mobility risk shifting contracts will not be offered and wage rates will vary with the marginal product of labor in this case the market in labor is a spot market the risk shifting role of labor contracts may be salvaged by a social convention that binds workers to their firms this would require that a worker who leaves his employer earlier than the accepted norm would be viewed as breaking a social convention and develop a damaging reputation we shall refer to this type of convention as a binding convention 2 it appears that a binding convention is assumed in most of the implicit contract literature binding however comes at a cost while facilitating risk shifting it may lead to inefficient resource allocation with a binding convention the tradeoff between the loss in output and the extent of workers exposure to risk depends on the nature of risks faced by the firm when the only risk that firms face is an aggregate shock defined as a shock that affects all firms in a sector in the same way binding does not reduce production efficiency if the marginal product of labor is the same in all firms the worker s place of employment does not affect output

dynamic labor contracts under asymmetric information abstract this paper discusses the distortion of employment within a two period asymmetric information contracting model in which an exogenous demand shock is serially correlated and is known only to firms the obtained results show that serial correlations of the state of nature can cause not only underemployment but also overemployment even when overemployment never occurs in the context of a static asymmetric information contracting model

wages and employment in a repeated game with revenue fluctuations abstract empirical investigations suggests that the real wage is surprisingly flat over the business cycle this paper analyses a repeated game between a union and a firm which can contribute to explaining the flat wage the parties cannot enter binding contracts and revenue is fluctuating the paper focuses on the best subgame perfect equilibrium among those sharing the expected surplus in given fixed shares e g equal shares it is shown that for moderate discount factors this equilibrium has a more counter cyclical wage than what would be the case if the parties shared the surplus in each period in the same shares

contractual design with correlated information under limited liability we examine contractual design in a principal agent model under two forms of limited liability nonnegative constraints on the transfer payments to and the profits of the agent we show that when limited liability is a binding constraint the principal cannot implement the first best solution and the agent earns rents from private information limited liability is a binding constraint in the nonnegative transfers model only when a signal is insufficiently responsible to type inelastic further as the production rule and profits are continuous in the type elasticity of the signal density function the level of the inefficiency is less than that which obtains with no signal if a signal is sufficiently responsive to type elastic in this environment then the principal can implement the first best allocation and the value of the agent s private information is zero we show that limited liability will always be a binding constraint in the nonnegative ex post profits model regardless of the information content of the signal the production rule and welfare are increasing in the informativeness of the signal

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

testing whether unemployment represents intertemporal labour supply behaviour in the lucas rapping 1969 model of the labour market fluctuations in unemployment represent individuals optimally adjusting their labour supply behaviour in response to fluctuations in wage rates over the business cycle in this paper i propose and implement a misspecification test of the lucas rapping treatment of unemployment as labour supply behaviour using panel data this test extends previous such work with micro data by simultaneously allowing for intertemporal substitution uncertainty and endogenous unemployment using the standard specification of intertemporal labour supply behaviour i find strong evidence against this interpretation of unemployment there are two possible interpretations of the test results the first is that it is necessary to turn to alternative models of the labour market in which unemployed workers are off a supply function the second is that the test results indicate the necessity of moving to more complex models of intertemporal substitution however given current econometric techniques and data sets these alternative models of intertemporal substitution will be extremely difficult to test

co operatives closures or wage cuts the choices facing workers in an ailing firm workers faced with the prospect of the closure of their workplace have a limited range of alternatives they can accept the closure they can accept wage cuts or they can take over the firm and form a cooperative the author finds that if wages are determined in each period in a spot market then there are circumstances in which workers prefer the latter option in particular he finds that workers in an ailing firm may well prefer the cooperative option to closure of their workplace

profit sharing risk sharing and firm size implications of efficiency wages by taking account of output fluctuations this paper constructs a synthesis of profit sharing and efficiency wage models to highlight the role of the risk attitudes of the firm and its employees we show contrary to the traditional efficiency wage theory that in a profit sharing economy unemployment is no longer a necessary device to induce work effort and consequently the labor market equilibrium may be characterized by full employment such a result is more likely to be true when the economy is characterized by small sized firms in addition we also provide a preliminary sketch of the situations in which the firm chooses a profit sharing program or a fixed wage one and discuss how a firm determines its pay parameters and employment in response to output fluctuations

a signalling approach to wage rigidity and layoffs this paper presents an alternative approach to optimal labour contracts where rigid wages are used to convey information rather than to insure workers firms with favourable probability distributions over revenue functions signal this to workers by means of wage rigidities and employment distortions including the possibility of layoffs this occurs in the absence of any risk aversion

wage bargaining labor turnover and the business cycle a model with asymmetric information this paper presents a wage bargaining model in which the employer and employee are each uncertain about the other s reservation wage under specified circumstances the model s equilibrium is shown to involve unilateral wage setting and inefficient labor turnover in addition aggregate demand shocks affect the equilibrium in a way that produces procyclical quits and countercyclical layoffs these results are obtained without resorting to assumptions of nominal wage rigidity long term contracting or aggregate price misperceptions

redundancy payments and firm specific training this paper attempts to provide an economic rationale for the existence and pattern of redundancy payments a model of firm specific training with uncertain returns to training and uncertainty about the outside options of workers is constructed for this purpose the central result is that an optimal contract will involve the firm in bearing only a part of the training costs because workers may quit since workers bear part of the cost of training they will have to be compensated by a redundancy payment if dismissed furthermore the optimum level of this redundancy payment will vary across firms with large payments being offered by firms where the returns to training are highly variable these insights into the nature of redundancy payments differ from those of other models where they are viewed either as a transfer fee or as representing the difference between inside and outside wages for contracted workers

a note on capital markets and bankruptcy constraints in contracting abstract this note considers the extent to which state contingent bankruptcy constraints in a standard contracting problem with adverse selection can be mitigated by a risk neutral third party it shows that if payoffs of principal and agent are quasi linear the third party can only affect the constraints if it has complete information about the agent s type observing a correlated signal is not enough