ABSTRACT
This chapter illustrates the impact of informational asymmetries, enforcement problems and other restrictions on patterns of wages and employment. It explains the macroeconomic implications of the contracting approach. The chapter presents a series of models which take these contracting features as given and explores their implications for business cycles and the design of macroeconomic policy. It provides the basic contracting model to a macroeconomic setting to obtain some predictions about nominal compensation patterns and economy-wide employment fluctuations. The chapter also explores the implications for contract design of adding a variety of restrictions to the contracting problem. It seeks to remedy the lack of balance by concentrating on the macroeconomic implications of the contracting view of labor market behavior. The chapter examines the implications of the contracting approach from both an empirical and theoretical perspective. It also illustrates some of the possible macro-implications of optimal labor contracts as well as some of the difficulties with providing the micro-foundations.
