OPTIMAL UNEMPLOYMENT INSURANCE,WITH HUMAN CAPITAL DEPRECIATION,AND DURATION DEPENDENCE*

This article introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework and characterizes the efficient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal assistance level that arises endogenously in the efficient contract. Second, the optimal scheme implies a wage subsidy for long‐term unemployed workers. Numerical simulations based on the Spanish and U.S. economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries.     

Contracts and externalities: How things fall apart

A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many uncontracted or “free” agents there are. We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are considered. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying) terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are “discontinuously” lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principal's overtures temporarily, but they must succumb in finite time. In both models, despite being able to coordinate their actions, agents cannot resist an “invasion” by the principal and hold to their best payoff. It is in this sense that “things [eventually] fall apart”.     

Enforcement frictions and optimal lending contracts

I consider an environment in which contract enforcement is a decision variable for the principal. I construct a model in which entrepreneurs cannot commit to repaying investors for the capital advanced, but investors can force repayment by spending resources. The principal uses enforcement to reduce the resources available to the agent after a default, thus providing incentives for the agent to stay in the relationship. She also ensures contract compliance by backloading the payments to the agent: expected utility rises over time, preventing a default. I consider an application of the framework developed in the paper to the area of firm dynamics. I show that enforcement and backloading are always used jointly. Firm size (measured by capital) grows with time and each firm converges to the efficient size. A second application is to the field of economic development. Costlier enforcement leads to the choice of sub-optimal technology; secondly, it leads to inefficient dispersion of capital across establishments.     

Present-biased preferences,self-awareness and shirking

We model a mechanism design problem in which the principal owns a project that requires work effort by an agent, but agents may have time-inconsistent, present-biased preferences and lack complete self-awareness of these preferences. The self-control problem and naïveté of an agent may lead him to agree to a contract but later shirk or slack-off, even though doing so is observable. When the principal cannot severely punish shirking and agents are completely naïve, the second-best solution entails allowing a present-biased agent to slack-off in order to avoid a greater loss due to shirking. With greater self-awareness among present-biased agents, the principal may do better by screening some from accepting the contract. Furthermore, when shirking can be severely punished, this does not lead to contracts that eliminate effects of the self control problem. Instead the principal may exploit present-biased agents by offering a contract that allows them to slack-off (which agents fail to foresee they will choose to do) but at the expense of foregoing much compensation.     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

Moral Hazard and Renegotiation with Multiple Agents

We investigate the effects of contract renegotiation in multi-agentsituations where risk-averse agents negotiate a contract offer to theprincipal after the agents observe a common, unverifiable perfect signalabout their actions. We show that renegotiation with multiple agentsreduces the cost of implementing any implementable action profile downto the first-best level, even though the principal cannot observe theagents' actions. Moreover, it is sufficient for the principal to use a"simple" initial contract, in the sense that it consists of nomore than a single sharing scheme for each agent and the total payments tothe agents are the same regardless of the realised state. An importantimplication is that decentralization, in the sense of delegated negotiationand proposals from the agents, can be as effective as centralized schemesthat utilize revelation mechanisms in unrestricted ways.     

Erratum to “Negotiation and take it or leave it in common agency”: [Journal of Economic Theory 111 (2003) 88-109]

The no-externalities condition provided in the text is not sufficient for Theorems 3 and 4 when effort is not fully contractable. In the case where the principals cannot contract at all on agent's effort, the condition in the text requires that for any set of alternatives offered by the principal there is one that is at least as good as all other alternatives in the set for the agent no matter what the other principal does, no matter what effort the agent takes, and no matter what the agent's type. In fact, a stronger condition is required. For any set of alternatives offered by a principal, each of the choices within this set that is at least as good for the agent as any other choice within the set must remain so no matter what actions the other principals take, no matter what effort the agent takes, and no matter what the agent's type.     

Bounded Rationality in Principal‐Agent Relationships

We conducted six treatments of a standard moral hazard experiment with hidden action. The behavior in all treatments and periods was inconsistent with established agency theory. In the early periods, behavior differed significantly between treatments. This difference largely vanished in the final periods. We used logit agent quantal response equilibrium (LAQRE) as a device to grasp boundedly rational behavior and found the following: (1) LAQRE predictions are much closer to subjects' behavior in the laboratory; (2) LAQRE probabilities and experimental behavior show remarkably similar patterns; and (3) including social preferences in LAQRE does not better explain the experimental data; (4) LAQRE cannot explain the contract offers of some players who seem to choose some focal contract parameters.     

Compensation Convexity without Utility Restriction

We develop an optimal contract model on the use of stock options for chief executive officer compensation under the Mirrlees–Rogerson moral hazard framework. We find that convexity, as know as, the use of stock options, can arise with a broader range of agent utility functions than allowed by Hemmer et al. ( 2000 ). We characterise the necessary conditions regarding the behaviour of the agent's marginal risk tolerance for both the concavity and convexity cases of the likelihood‐ratio function. We find stock options need to be used more intensively, when the agent displays a higher marginal risk tolerance and when the realised task output is higher.     

Under what conditions may social contracts arise? Evidence from the Hanseatic League

Social contractarians commonly take social contracts to be solely hypothetical and refrain from elaborating on the factors that influence the feasibility of the formation of social contracts. In contrast, this paper aims at providing a discussion of the conditions affecting the feasibility of social contracts. I argue that the more aligned the preferences of group members for public goods are, the more the individuals share similar social norms, and the smaller the group is the more feasible a genuine social contract becomes. I provide evidence in support of my contention from the medieval Hanseatic League. At the Hanseatic Kontor in Novgorod, one of the four major trading posts of the Hanseatic League in cities outside of Germany, German merchants agreed to live under the rule of a constitution that gave rise to a political authority for the Kontor society.     

DIRECTED SEARCH WITH PHANTOM VACANCIES

When vacancies are filled, the job ads often remain, creating phantom vacancies. Older listings more likely represent phantoms. We assume job seekers direct their search based on listing age. Forming a match with an age-a vacancy creates an age-a phantom with probability β and generates an externality affecting vacancies aged a and older. Thus, the externality decreases with the match's listing age. Relative to efficient behavior, job seekers overapply to younger listings. We calibrate using U.S. data. The contribution of phantoms to inefficiency is large, but, given their existence, the planner cannot improve much on the directed search allocation.     

How important is the type of working contract for job satisfaction of agency workers?

Previous research finds that agency workers are less satisfied with their job than regular workers. This paper analyzes whether this difference can be explained by the duration of the working contract agency workers are employed on. The analysis leads to three results. First, agency workers’ contract type does not explain their lower job satisfaction. Second, agency workers on permanent contracts are significantly less satisfied with their job than regular workers on the same contract. Third, agency workers on fixed-term contracts do not differ in job satisfaction from regular workers on both fixed-term and permanent contracts. The difference in job satisfaction between permanently employed agency and regular workers can partly be explained by changes in the reference point. Overall, the results, however, lend support to the conclusion that agency workers on fixed-term contracts regard their employment as stepping stone while those on permanent contracts appear to be trapped in this type of employment.     

A note on long-term contracts

The purpose of this paper is three-fold: (i) to interpret Townsend's (1982) long-term contract model as a labor contract model where a value of job matching for a worker is a private information, (ii) to contrast Townsend's long-term contract model with Holmstrom's (1983) long-term contract model in a common framework, and (iii) to explore the effect of workers' mobility on the contract configuration of the two models.Both Holmstrom and Townsend construct models in which a single-period contract is not viable, but a long-term contract is. However, reasons for this characteristic in the two models are quite different. This paper proposes a simple framework of labor contracts with illustrates the essential difference of the two models, and the role of mobility costs. Mobility costs in the two types of long-term contracts are shown to be beneficial for both workers and the firm. Results of comparative statics show how contract configurations in two models are influenced by changes in mobility costs.     

An equilibrium search model with optimal wage-experience contracts

The objective of this paper is to study equilibrium in a labour market, in which workers search on the job and firms offer wage contracts conditional upon workers' experience and employment status. In this environment, the optimal contract can be described by a promotion contract. The distribution of contract offers is dispersed within and across experience levels. As workers stay longer in the market and promotion dates get closer, the option value of holding a job increases. Firms offer early promotions to attract more experienced workers. A positive relation between experience and earnings can arise purely from firms' optimal response to labour market competition brought about by workers' on-the-job search. We characterise the offer distribution for each experience level and show how these change with labour market conditions.     

ON THE INTERPRETATION OF COVARIATE ESTIMATES IN INDEPENDENT COMPETING-RISKS MODELS*

Competing-risks models are becoming increasingly pervasive in applied research to explain the factors determining both the time in a state (i.e. unemployment) and the exit route from the state (is. leaving unemployment for a job or non-participation). However, as in many limited dependent variable models, the interpretation of the covariate estimates requires care. Despite assertions to the contrary in many published papers, it is shown that the estimated qualitative effect of a covariate on the hazard for risk j typically conveys no information on its qualitative effect on either the likelihood of, or expected time until, exit via j. This is because such magnitudes depend on the qualitative and quantitative effects of the covariate on other risks which cannot be ignored. The point is demonstrated by using UK data on the unemployment to re-employment transitions of a sample of male job losers.     

SHOULD YOU ALLOW YOUR EMPLOYEE TO BECOME YOUR COMPETITOR? ON NONCOMPETE AGREEMENTS IN EMPLOYMENT CONTRACTS*

We discuss a principal–agent model in which the principal has the opportunity to include a noncompete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal, as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict noncompete agreement.     

Earnings mobility in Spain: the role of job mobility and contractual arrangements

This paper analyses the relationship between earnings mobility, job mobility and changes in the contractual arrangement in Spain using a sample of Spanish workers aged 16–60 years extracted from the European Community Household Panel Survey (ECHP 1995–2001). Overall, earnings mobility remains mostly unchanged over time, although clear differences, both in terms of levels and trends, can be perceived among different types of workers. Results show that, in general, job mobility contributes to increase earnings mobility. Switching into permanent contract are associated with the highest probability of upgrading among those workers who remain with the same employer. In contrast, the highest risk of downgrading among stayers appears when changing from permanent to temporary. An analysis on low pay/no low pay transitions reveals that job mobility always increases the probability of moving from low pay to better-paid jobs among females. For males, in contrast, this occurs only when they were initially employed on a temporary basis. Furthermore, for females it is found that either switching into permanent contract while staying with the same employer, or changing employer while being employed on a permanent basis yield a higher chance of upgrading than staying with the same employer with a permanent contract.      

Compensating for unforeseeable damages in torts

The doctrine regarding unforeseeable damages in a contract was established in the well known case of Hadley vs. Baxendale. According to the judgement, a plaintiff cannot be compensated for unforeseeable damages in an incomplete contract unless he informs the defendant of the possible unforeseen contingency beforehand. In this paper, I extend the argument to the tort case in which it is hardly possible to communicate between a plaintiff and a defendant before an accident occurs. In the case of the sequential bilateral accident in which the victim’s care level is observable to the injurer, the victim’s care level can be a signal of the unforeseen contingency. I mainly discuss the implementability of the social optimum by the contributory negligence with dual standard of care enabling the communication between the parties.     

Collusion and Renegotiation in a Principal–Supervisor–Agent Relationship

We describe a principal–supervisor–agent relationship in which agent and supervisor may collude. To prevent collusion, the principal may contract on a noisy signal which is correlated with the occurrence of collusion. When the signal is informative enough, the principal uses it and no collusion occurs in equilibrium. These contracts, however, are ex post inefficient and are only optimal if the principal can commit not to renegotiate. With renegotiation it is never optimal for the principal to prevent collusion and, at the same time, condition contracts on the signal. In fact, when the signal is informative enough collusion occurs in equilibrium.