Implicit Contracts, Labour Mobility and Unemployment

Abstract

Firm's inability to monitor employees search efforts results in a tradeoff between risk-bearing and incentive considerations in the design of employment-related insurance. Since the provision of insurance against firm-specific shocks adversely affects workers' incentives to search out better jobs, only partial insurance will be provided to encourage workers to stay (leave) at high (low) productivity firms: in this setting, quits and layoffs are alternative means of inducing separations at low productivity firms. This paper describes the equilibrium labour contract when search information is private, and is thereby able to provide the first unified treatment of risk-sharing contracts, interfirm mobility, worksharing, layoffs, severance pay, on-the-job and off-the-job search, quits and unemployment.