Discussion Paper
On Implicit Contracts and Involuntary Unemployment
We show that a firm can increase expected profits by undertaking the additional expense of paying unemployment compensation to the workers it lays off, if they are risk averse. When this argument is applied to the implicit contract models it makes the involuntary unemployment derived there disappear, where by involuntary unemployment we mean a situation in which one worker has a job at a wage w and another worker who is known to be productively identical and willing to take on the job at a lower wage h cannot find a job.