Optimal employment contracts with bankruptcy constraints |
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Authors: | Charles Kahn Jose Scheinkman |
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Institution: | University of Chicago, Chicago, Illinois 60637 USA |
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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. |
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