QUARTERLY JOURNAL OF ECONOMICS We begin the tour in Section ii with a description of the empirical regularities to be explained, and review in Sections III and iv the major insights of implicit contract theory-from the older, public information literature, as well as from more recent work on asym metric information. The newer literature makes heavy use of som concepts common to many self-selection problems; we discuss these lrb epts in Section V Section VI covers macroeconomic aspects of implicit contracts-in particular, their relation to the fixed price literature. The concluding section is concerned with a survey of un- resolved issues II Over a typical business cycle average wages fluctuate less vig orously than does labor's marginal revenue product or, for that matter, the total volume of employment(see Hall 1980 ). The great De pression is a sad illustration: from 1929 to 1933 U.S. employment fell precipitously, while real wages managed to creep upward At a less aggregative level, it is standard collective bargaining procedure to predetermine money wage rates for two or three years in advance, even though wage rigidity does not promote employment in recessions. 2 The sluggishness of money wage rates, notably in periods of relatively stable inflation, and the strong contribution of layoffs to yclical unemployment in north america have long been two of the best-documented stylized facts in economics. Wage and price rigidity are also among the key assumptions of Keynesian macroeconomics, both in the Hicksian IS/LM framework(see Hicks [1937 )and in the very interesting concept of quantity-constrained equilibrium origi nally developed by Patinkin [1956, Clower [1965], Hansen [1974] Solow-Stiglitz[1968, Younes[1970, and Barro-Grossman [1971 and formalized by European economists in the 1970s. 4 Keynes's own explanation of wage rigidity [1936, p. 13-15] was a sophisticated form of money illusion; workers resist cuts in money rates because they do not know how widespread these cuts will to be, each worker fearing a fall in his own wage relative to s Relative wage arguments suggest that "fairness "in the wage 2. However, as the recer nce in the United States indicates, if too large the contract. Cousineau and Lacroix [1981] ar an interesting set of ning agreements and Malinvaud 1977] relopmeats appear in Benassy [1975 Dreze[1975], Younes( 1975),2 QUARTERLY JOURNAL OF ECONOMICS We begin the tour in Section I1 with a description of the empirical regularities to be explained, and review in Sections I11 and IV the major insights of implicit contract theory-from the older, public￾information literature, as well as from more recent work on asym￾metric information. The newer literature makes heavy use of some concepts common to many self-selection problems; we discuss these concepts in Section V. Section VI covers macroeconomic aspects of implicit contracts-in particular, their relation to the fixed price literature. The concluding section is concerned with a survey of un￾resolved issues. Over a typical business cycle, average wages fluctuate less vig￾orously than does labor's marginal revenue product or, for that matter, the total volume of employment (see Hall [1980]). The Great De￾pression is a sad illustration: from 1929 to 1933 U.S. employment fell precipitously, while real wages managed to creep upward. At a less aggregative level, it is standard collective bargaining procedure to predetermine money wage rates for two or three years in advance, even though wage rigidity does not promote employment in recession^.^ The sluggishness of money wage rates, notably in periods of relatively stable inflation, and the strong contribution of layoffs to cyclical unemployment in North America have long been two of the best-documented stylized facts in economic^.^ Wage and price rigidity are also among the key assumptions of Keynesian macroeconomics, both in the Hicksian ISILM framework (see Hicks [1937]) and in the very interesting concept of quantity-constrained equilibrium origi￾nally developed by Patinkin [1956], Clower [1965], Hansen [1974], Solow-Stiglitz [1968], Youn6s [1970], and Barro-Grossman [1971], and formalized by European economists in the 1970~.~ Keynes's own explanation of wage rigidity [1936, p. 13-15] was a sophisticated form of money illusion; workers resist cuts in money wage rates because they do not know how widespread these cuts will prove to be, each worker fearing a fall in his own wage relative to others. Relative wage arguments suggest that "fairness" in the wage 2. However, as the recent experience in the United States indicates, if too large a level of unemployment is caused by wage rigidity, both sides may agree to renegotiate the terms of the contract. Cousineau and Lacroix [I9811 analyze an interesting set of data collected from Canadian collective bargainin 3. An example is the work of Feldstein [I976 4. The main developme.~ts appear in Nnassy YounGs [1975], and Malinvaud [1977]