| Publisher | Federal Reserve Bank of St. Louis | ||
|---|---|---|---|
| Format | 403.5KB PDF, requires Acrobat Rdr 5 | Date added | 01 May 1999 |
| Topics | HR | ||
| Downloads | 0 | ||
Models of moral hazard in labor relationships have proven to be useful in explaining a variety of important macroeconomic phenomena. The existence of involuntary unemployment has been linked to the need to provide incentives for workers to choose high effort. Further, since wage levels are important for workers’ incentives, adjustment of wages in response to cyclical shocks may be subject to contractual constraints. More recently, contracting problems have been tied to inefficient severance of employment relationships, giving a mechanism whereby business cycle shocks may be magnified and made more persistent (Ramey and Watson, 1997a). This paper focuses on the contract-theoretic underpinnings of wage adjustment and worker displacement in moral-hazard models of the labor market.
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