Job Matching When Employment Contracts Suffer from Moral Hazard
32 Pages Posted: 11 Nov 2010
Date Written: September 14, 2010
We consider a job matching model where the relationships between firms and wealth-constrained workers suffer from moral hazard. Specifically, effort on the job is non-contractible so that parties that are matched negotiate a bonus contract. Higher unemployment benefits affect the workers’ outside option. The latter is improved for low skilled workers. Hence they receive a larger share of the surplus, which strengthens their effort incentives and increases productivity. Effects are reversed for high skilled labor. Moreover, raising benefit payments affects the proportion of successful matches which induces some firms to exit the economy and causes unemployment to increase.
Keywords: Job Matching, Incentive Contracts, Unemployment Benefits, Nash Bargaining, Moral Hazard
JEL Classification: J65, D82, J41, E24
Suggested Citation: Suggested Citation