IMPLICIT CONTRACTS AND FIXED PRICE EQUILIBRIA 7 market. Nevertheless, equilibrium contracts will be structured so that workers choose not to annul them: wages in the first period, when workers cannot leave are lower than(the expected value of) MRPL in the second period wages rise to equal either a state-invariant rate or the spot rate, whichey New workers on contract thus pay the firm a"bond"that assures they will behave reliably in the future. As the bond is amortized over time, veteran employees receive higher wages than rookies do--at least as high, in fact, as spot wages. Holmstrom's multiperiod equi librium thus yields reliable behavior on the part of workers(his firms being reliable by definition), wage differentials by seniority class, and a weakening of strict wage rigidity to downward rigidity Holmstrom's argument parallels the standard argument as to how the firm recovers the costs of specific training of workers. 12If workers have limited access to the capital market, increased mobility implies that their consumption stream over time is not so smooth as it otherwise would be and there is a welfare loss as a result in addi tion, however, workers may need to leave the firm for a variety of good reasons(their health is bad, their mother- in-law moves to a nearby state, etc.) Unfortunately, there is no easy way of distinguishing these le- gitimate motives for quitting from the opportunistic motives (i.e simply reneging on the contract). Hence any contract that requires workers to post bonds imposes some risk on them-the risk that they forfeit the bond even if they desire to change jobs for noneconomic reasons. As a result, there will seldom be"complete"bonding. Finally there is always another risk associated with any theory of contract enforcement through bonding: that the employer will fire the worke (or, equivalently, make work conditions so unattractive that the worker will be induced to quit and forfeit the bond). 13 To avoid these difficulties, either a far more complicated bonding scheme must be established, or we must rely on a theory of reputation for firms Let us return to a simpler world in which firms are thoroughly trustworthy and workers never quit for family reasons. Having at least assured ourselves that we can redesign the time path of wage pay ments to extract reliable behavior from workers, we go back to the single-period enforceable contract structure of Figure I to reflect onIMPLICIT CONTRACTS AND FIXED PRICE EQUILIBRIA 7 market. Nevertheless, equilibrium contracts will be structured so that workers choose not to annul them: wages in the first period, when workers cannot leave, are lower than (the expected value of) MRPL; in the second period wages rise to equal either a state-invariant rate or the spot rate, whichever is greater. New workers on contract thus pay the firm a "bond" that assures they will behave reliably in the future. As the bond is amortized over time, veteran employees receive higher wages than rookies do-at least as high, in fact, as spot wages. Holmstrom's multiperiod equi￾librium thus yields reliable behavior on the part of workers (his firms being reliable by definition), wage differentials by seniority class, and a weakening of strict wage rigidity to downward rigidity. Holmstrom's argument parallels the standard argument as to how the firm recovers the costs of specific training of workers.12 If workers hhve limited access to the capital market, increased mobility implies that their consumption stream over time is not so smooth as it otherwise would be, and there is a welfare loss as a result. In addi￾tion, however, workers may need to leave the firm for a variety of good reasons (their health is bad, their mother-in-law moves to a nearby state, etc.). Unfortunately, there is no easy way of distinguishing these le￾gitimate motives for quitting from the opportunistic motives (i.e., simply reneging on the contract). Hence, any contract that requires workers to post bonds imposes some risk on them-the risk that they forfeit the bond even if they desire to change jobs for noneconomic reasons. As a result, there will seldom be "complete" bonding. Finally, there is always another risk associated with any theory of contract enforcement through bonding: that the employer will fire the worker (or, equivalently, make work conditions so unattractive that the worker will be induced to quit and forfeit the bond).13 To avoid these difficulties, either a far more complicated bonding scheme must be established, or we must rely on a theory of reputation for firms. Let us return to a simpler world in which firms are thoroughly trustworthy and workers never quit for family reasons. Having at least reassured ourselves that we can redesign the time path of wage pay￾ments to extract reliable behavior from workers, we go back to the single-period enforceable contract structure of Figure I to reflect on 12. A more extensive treatment appears in Arnott and Stiglitz 11981J. 13. See Shapiro and Stiglitz [I9821 for a detailed discussion of this problem