Optimal employment contracts with bankruptcy constraints

Charles Kahn, Jose Scheinkman

Research output: Contribution to journalArticle

Abstract

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 languageEnglish (US)
Pages (from-to)343-365
Number of pages23
JournalJournal of Economic Theory
Volume35
Issue number2
DOIs
StatePublished - Aug 1985

ASJC Scopus subject areas

  • Economics and Econometrics

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