ARTERLY JOURNAL OF ECONOMICS the nature of layoff unemployment 4 How close is the unemployment we discussed in the previous section to the involuntary unemployment that economists are so concerned about? The fact that laid-off workers would gladly exchange places with their employed colleagues is not in itself sufficient to establish a misallocation of resources. After all, accident victims may very well envy more fortunate individuals without any implication that the insurance industry works poorly Layoffs, by themselves, could be no more than the luck of the draw unless we can demonstrate that they constitute, in some sense, socially inefficient underemployment. This clearly impossible within the Walras-Arrow-Debreu model There are, in fact, two distinct questions that we can pose. One is do limitations on information . transactions costs etc when for mally modeled into the optimal design of the implicit contract, lead to levels of employment that are systematically lower than would occur in a Walrasian equilibrium? The second is, taking these limi tations on information transactions costs etc into account, can design (say, through tax policy)a Pareto improvement in the economy? Like most of the literature, this symposium focuses on the first question: i. e, on conditions under which market equilibrium might be characterized by layoffs, or by hours worked being less th in the corresponding Walrasian equilibrium One fundamental departure from the walrasian paradigm that seems much in the spirit of implicit contracts is to alter the informa tional assumptions; information is no longer“" public”or“ symmetric,” it is"private"or"asymmetric, since only one side of the observes the relevant state of nature. Four of the papers that appear in this issue(by azariadis, Chari, Green and Kahn, and grossman and Hart)study the properties of implicit contracts when the value of labor's marginal revenue product is known only to the entrepre neur Asymmetric information is essential for a thorough under standing of implicit contracts and, as we shall see later in this essay, for their use in macroeconomics as well. what justifies the trading of these contracts in the first place is that third parties simply are not as well informed about someone's income or employment status as is his employer; the employer, in turn, may be less informed about an yaza 4. Developments here were greatly influenced by the paper of Akerlof and Mi o and Phelps [1977 were the first to pose this question; for related work see Hall and Lilien 19798 QUARTERLY JOURNAL OF ECONOMICS the nature of layoff unemployment.14 How close is the unemployment we discussed in the previous section to the involuntary unemployment that economists are so concerned about? The fact that laid-off workers would gladly exchange places with their employed colleagues is not in itself sufficient to establish a misallocation of resources. After all, accident victims may very well envy more fortunate individuals without any implication that the insurance industry works poorly. Layoffs, by themselves, could be no more than the luck of the draw unless we can demonstrate that they constitute, in some sense, socially inefficient underemployment. This is clearly impossible within the Walras-Arrow-Debreu model. There are, in fact, two distinct questions that we can pose. One is, do limitations on information, transactions costs, etc., when for￾mally modeled into the optima1 design of the implicit contract, lead to levels of employment that are systematically lower than would occur in a Walrasian equilibrium? The second is, taking these limi￾tations on information, transactions costs, etc., into account, can we design (say, through tax policy) a Pareto improvement in the economy? Like most of the literature, this symposium focuses on the first question: i.e., on conditions under which market equilibrium might be characterized by layoffs, or by hours worked being less than in the corresponding Walrasian equilibrium. One fundamental departure from the Walrasian paradigm that seems much in the spirit of implicit contracts is to alter the informa￾tional assumptions: information is no longer "public" or "symmetric," it is "private" or "asymmetric," since only one side of the market observes the relevant state of nature. Four of the papers that appear in this issue (by Azariadis, Chari, Green and Kahn, and Grossman and Hart) study the properties of implicit contracts when the value of labor's marginal revenue product is known only to the entrepre￾neur.15 Asymmetric information is essential for a thorough under￾standing of implicit contracts and, as we shall see later in this essay, for their use in macroeconomics as well. What justifies the trading of these contracts in the first place is that third parties simply are not as well informed about someone's income or employment status as is his employer; the employer, in turn, may be less informed about an 14. 1)evelopments here were greatly influenced by the paper of Akerlof and Mi￾yazaki [1980]. 15. Calvo and Phelps [1977] were the first to pose this question; for related work see Hall and 1,ilien [1979]