Assuming that the former are prevented from accessing capital markets and are more risk averse than the latter we use the theory of optimal contracts to derive an equilbrium relation between aggregate states of the economy and wage-labor outcomes. This contractual arrangement is then embedded into a standard one-sector, stochastic neoclassical growth model in order to look at the business cycle implications of the contractual hypothesis. The resulting dynamic equilibrium relations are then parameterized and studied by means of standard numerical approximation techniques. The quantitative properties of our model appear to be somewhat encouraging. The present paper reports only the simulation results relative to wconsider the most empirically relevant cases.
More results are available from the authors.