Worker response to a menu of implicit contracts.

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Albert N. Link, Professor (Creator)
The University of North Carolina at Greensboro (UNCG )
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Abstract: The literature on implicit contracts between workers and firms suggests that workers face a variety of such contracts, allowing each to choose the optimal trade-off between earnings level and earnings stability. This study tests some implications of that theory through an examination of the risk behavior of individual heads of households. The data source is the University of Michigan Panel Study of Income Dynamics, which includes a measure of the worker's taste for risk avoidance. Additionally, several predictions derived from Arrow's postulate of increasing relative risk aversion are examined. The results confirm a tendency of risk-averse individuals to choose jobs offering lower wages and lower financial risk. The results also provide indirect support for Arrow's postulate. The paper's findings suggest that studies of the earnings effects of discrimination may possibly understate those effects, just as studies of the value of a human life may understate that value. A NUMBER of articles appeared almost /vsimultaneously in 1974-75 on the subject of implicit contracts between workers and firms.' All sought to provide a rationale based on utility-maximizing be- •Don Bellante is a professor of economics at Auburn University and Albert Link is a professor of economics at the University of North Carolina at Greensboro. They appreciate helpful comments on earlier versions by Timothy Deyak, Robert M. Feinberg. Barry Hirsch, Fred Johnson, James E. Long, and J. Wilson Mixon. 'Costas Azariadis, "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, Vol. 83, No. 6 (November/December 1975), pp. 1183-1202; Martin Baily, "Wages and Employment under Uncertain Demand," Review of Economic Studies, Vol. 41, No. 1 (January 1974), pp. 37- 50; and

Additional Information

Language: English
Date: 1982
implicit contracts, employment contracts, labor relations, earnings stability, risk behavior, risk avoidance, financial risk, earnings discrimination

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