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Bankruptcy and Unemployment in Optimal Wage Employment Contracts

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Authors
Ghosh, Satyajit
Issue Date
1989-07
Publisher
Institute of Economic Research, Seoul National University
Citation
Seoul Journal of Economics, Vol.2 No.2, pp. 143-160
Keywords
non-WalrasianLayoff and Worksharingexcessive layoffs
Abstract
Optimal wage employment contracts under asymmetric information have shown that, if the firm is risk neutral and has the informational advantage over the risk averse workers, the second best contract prescribes underemployment if and only if the workers view leisure as an inferior good, and overemployment if and only if leisure is a normal good. In this paper it is shown that if leisure is a normal good and that if the firm wants to avoid bankruptcy, the optimal layoff contract, with optimal severance payment, may prescribe unemployment. A stronger unemployment result is obtained in the absence of severance pay. Finally, it is shown that, if the contracts specify both the working hours and the number of empolyed workers, the optimal contract may exhibit unemployment with respect to both the number of workers and the working hours, provided few technological preconditions are satisfied.
Optimal wage employment contracts under asymmetric information have shown that, if the firm is risk neutral and has the informational advantage over the risk averse workers, the second best contract prescribes underemployment if and only if the workers view leisure as an inferior good, and overemployment if and only if leisure is a normal good. In this paper it is shown that if leisure is a normal good and that if the firm wants to avoid bankruptcy, the optimal layoff contract, with optimal severance payment, may prescribe unemployment. A stronger unemployment result is obtained in the absence of severance pay. Finally, it is shown that, if the contracts specify both the working hours and the number of empolyed workers, the optimal contract may exhibit unemployment with respect to both the number of workers and the working hours, provided few technological preconditions are satisfied.
ISSN
1225-0279
Language
English
URI
https://hdl.handle.net/10371/864
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of Economics (SJE)Seoul Journal of Economics vol.02(2) (Summer 1989)
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