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Optimal employment contracts with bankruptcy constraints

1985; Elsevier BV; Volume: 35; Issue: 2 Linguagem: Inglês

10.1016/0022-0531(85)90048-1

1095-7235

Charles M. Kahn, José Scheinkman,

Economic Policies and Impacts

Consider the optimal incentive compatible contract offered by a firm with private information to its risk-averse employees. If the firm is subject to a binding limited liability or bankruptcy constraint then the contract will yield underemployment in low productivity states (relative to full-information efficiency). Such contracts either yield underemployment in all states, or excessively high variability in employment.