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' .superiorinformation about profitability conditions is responsible for this form of contract governance.Under plausible assumptions, such aj^reements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk.ll is shown that, if leisure is a normal good and firms are risk-neutral, employment is always ahoue 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.