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.
|Original language||English (US)|
|Number of pages||23|
|Journal||Journal of Economic Theory|
|State||Published - Aug 1985|
ASJC Scopus subject areas
- Economics and Econometrics