QUARTERLY JOURNAL OF ECONOMICS WORKER PRODUCTIONMRPL ACCOUNTI NG FIGURE I revenue product (MRPL); an insurance department that sells actu arially fair policies, and depending on the state of nature credits the worker with a net insurance indemnity (Nid)or debits him with a net insurance premium; and an accounting department that pays each employed worker a wage w with the property that w= MRPL + NII in every state of nature. Favorable states of nature are associated with high values of MRPL; in these the net indemnity is negative, and wage falls short of the MRPL, Adverse states of nature correspond to low values of MRPL, to positive net insurance indemnities, and to wages in excess of MRPL. An implicit contract is then a complete description, made before the state of nature becomes known, of the labor services to be rendered unto the firm in each state of nature, and of the corre sponding payments to be delivered to the worker. The contract is implementable if we assume the state of nature is directly observed by all sides An immediate consequence of this framework is that wages are disengaged from the marginal revenue product of labor. In fact, if we fix institutionally the amour nt of labor performed by employed workers, then each worker's consumption is proportional to the wage rate; an actuarially fair insurance policy should make this consump- tion independent of the MRPL by stabilizing the purchasing power of wages over states of nature. Ergo, the real wage rate is rigid In traditional macroeconomic models, of course, wage rigidity by itself is sufficient to cause unemployment: if wages do not adjust or some reason, than neither does the demand for labor. The argu4 QUARTERLY JOURNAL OF ECONOMICS 1 PRODUCTION MRPL _ ACCOUNT1 NG NII lNSURANCE DEPT. DEPT. DE PT. t f t FIRM FIGUREI revenue product (MRPL); an insurance department that sells actu￾arially fair policies, and depending on the state of nature, credits the worker with a net insurance indemnity (NII) or debits him with a net insurance premium; and an accounting department that pays each employed worker a wage w with the property that w = MRPL + NII in every state of nature. Favorable states of nature are associated with high values of MRPL; in these the net indemnity is negative, and wage falls short of the MRPL. Adverse states of nature correspond to low values of MRPL, to positive net insurance indemnities, and to wages in excess of MRPL. An implicit contract is then a complete description, made before the state of nature becomes known, of the labor services to be rendered unto the firm in each state of nature, and of the corre￾sponding payments to be delivered to the worker. The contract is implementable if we assume the state of nature is directly observed by all sides. An immediate consequence of this framework is that wages are disengaged from the marginal revenue product of labor. In fact, if we fix institutionally the amount of labor performed by employed workers, then each worker's consumption is proportional to the wage rate; an actuarially fair insurance policy should make this consump￾tion independent of the MRPL by stabilizing the purchasing power of wages over states of nature. Ergo, the real wage rate is rigid. In traditional macroeconomic models, of course, wage rigidity by itself is sufficient to cause unemployment: if wages do not adjust for some reason, than neither does the demand for labor. The argu-