Wage Rigidity, Implicit Contracts, Unemployment, and Economic Efficiency

Stiglitz, Joseph E.; Newbery, David M. G.

This article examines the theory of involuntary unemployment and implicit contracts. Furthermore, the article is concerned with identifying the circumstances under which implicit contracts will give rise to unemployment even though involuntary unemployment has been often attributed to wage rigidities generated by implicit contracts by themselves. Moreover, a simple, general equilibrium model and the three sources of restrictions on the set of feasible contracts: (1) information; (2) enforcement; and (3) complexity. Finally, it is concluded that implicit contracts can then provide an explanation of unemployment.



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Economic Journal

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April 25, 2013