IMPLICIT CONTRACTS AND FIXED PRICE EQUILIBRIA 5 ment does not carry over to implicit contracts because of the very separation between wages and the marginal revenue product of labor. A complete theory of unemployment must explain why layoffs are preferred to work sharing in adverse states of nature and why laid-off workers are worse off than their employed colleagues. This is not a simple task. Suppose for instance that employers are risk-neutral and that workers' preferences over consumption and leisure can be represented by a strictly quasi-concave, additively separable utility function. Then optimum contracts will result in complete work-sharing [Mortensen, 1978; and if such work-sharing s less profitable than layoffs for technological reasons(e.g, workers produce most efficiently when they put in a full-day' s effort), an op timum contract under perfect information will still equate th workers' marginal utility of consumption in states of employment and unemployment. Individuals may thus voluntarily ei ployed they would rather be laid off than work The resolution of this quandary has been the objective of much recent research on the theory of implicit contracts. The papers of this symposium represent a good step forward, but as we shall see later many questions remain unresolved. To explain unemployment, we need to complicate the analysis in some important way. Some of the complications arise from familiar problems in explicit(as opposed to implicit) insurance contracts, but a few of the problems are peculiar to implicit contracts One distortion that was noted early in the implicit contract lit erature concerns the role of the dole. In very adverse states of nature the flow of insurance indemnities to workers can become a substantial drain on profit; one way to staunch losses is to place the burden of insurance on an outside party, the dole(see Figure I). The practice of layoffs is simply the administrative counterpart of this insur ance-shifting maneuver; workers consent in advance that some of them may be separated from their jobs in order to become eligible for unemployment insurance (UI)payments from an outside public agency. Furthermore, no worker will contract his labor, unless the expected value (utility) of the total package taken over all possible states of nature exceeds the value of being on the dole in every state This means, in turn, that employed workers receive a wage in excess of Ui payments, and are therefore to be envied by their laid- off col- leagues-a situation that many economists would call"involuntary unemployment” This particular insurance contract between a third party(the government)and the other two parties(workers, firmsis not neces-IMPLICIT CONTRACTS AND FIXED PRICE EQUILIBRIA 5 ment does not carry over to implicit contracts because of the very separation between wages and the marginal revenue product of labor. A complete theory of unemployment must explain why layoffs are preferred to work sharing in adverse states of nature, and why laid-off workers are worse off than their employed colleagues. This is not a simple task. Suppose, for instance, that employers are risk-neutral and that workers' preferences over consumption and leisure can be represented by a strictly quasi-concave, additively separable utility function. Then optimum contracts will result in complete work-sharing [Mortensen, 19781;and if such work-sharing is less profitable than layoffs for technological reasons (e.g., workers produce most efficiently when they put in a full-day's effort), an op￾timum contract under perfect information will still equate the workers' marginal utility of consumption in states of employment and unemployment. Individuals may thus become involuntarily em￾ployed: they would rather be laid off than work. The resolution of this quandary has been the objective of much recent research on the theory of implicit contracts. The papers of this symposium represent a good step forward, but as we shall see later, many questions remain unresolved. To explain unemployment, we need to complicate the analysis in some important way. Some of the complications arise from familiar problems in explicit (as opposed to implicit) insurance contracts, but a few of the problems are peculiar to implicit contracts. One distortion that was noted early in the implicit contract lit￾erature concerns the role of the dole. In very adverse states of nature, the flow of insurance indemnities to workers can become a substantial drain on profit; one way to staunch losses is to place the burden of insurance on an outside party, the dole (see Figure I). The practice of layoffs is simply the administrative counterpart of this insur￾ance-shifting maneuver; workers consent in advance that some of them may be separated from their jobs in order to become eligible for unemployment insurance (UI) payments from an outside public agency. Furthermore, no worker will contract his labor, unless the expected value (utility) of the total package taken over all possible states of nature exceeds the value of being on the dole in every state. This means, in turn, that employed workers receive a wage in excess of UI payments, and are therefore to be envied by their laid-off col￾leagues-a situation that many economists would call "involuntary unemployment." This particular insurance contract between a third party (the government) and the other two parties (workers, firms) is not neces-