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Title:Commitment in Labor and Credit Contracts With Asymmetric Information, Bankruptcy and Extensive Form Gaming
Author(s):Tsoulouhas, Theofanis C.
Doctoral Committee Chair(s):Kahn, Charles M.
Department / Program:Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Theory
Abstract:This thesis investigates the effects of worker mobility and renegotiation on a firm's contracts for labor and credit, when information is asymmetric and the firm is subject to limited liability. These effects are analyzed in two chapters. The first chapter analyzes the contracts with commitment (that is, when renegotiation is not possible). The second chapter analyzes the contracts without commitment.
The framework considered in the analysis has two stages. In the first stage a firm offers a state-contingent contract to a worker and a creditor. If the contract is accepted by both parties, the capital supplied by the creditor is sunk. Between the two stages the firm observes the realization of the state of nature. If there is commitment to contracts, once the firm observes the state, it makes a public announcement of the state, and the contracts are carried out. If there is no commitment to contracts, renegotiation between the firm and the worker may occur before the firm announces the state. Thus, the second chapter analyzes renegotiation in the signaling subgame played by the firm and the worker once the state is realized and observed by the firm.
The main findings of the first chapter are: First, risk sharing between workers and creditors depends on the ex post mobility of the worker. If the worker is fully mobile, the creditor always bears the risk. If the worker is immobile, he likely bears the risk. Second, under asymmetric information, limited liability reduces the size of the firm. Third, the levels of employment and borrowing, as well as the allocational efficiency results, are the same for both immobile and mobile workers, because the optimum is dichotomized between production inputs and payments.
The main findings of the second chapter are: First, under asymmetric information, limited liability can induce renegotiation between the firm and the worker. Second, renegotiation-proofness depends on the mobility of the worker and the liquidation value of the firm. If the worker is immobile or the liquidation value of the firm is large, contracts are renegotiation-proof. If the worker is fully mobile and the liquidation value of the firm is small, contracts are not renegotiation-proof. There exist pooling renegotiation contracts which are ex post Pareto improving for the firm and the worker at the expense of the creditor. Third, the lack of commitment to contracts leads the creditor to demand a renegotiation-proof contract in the first stage of contracting. The renegotiation-proof contract reduces the size of the firm.
Issue Date:1993
Description:108 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1993.
Other Identifier(s):(UMI)AAI9411804
Date Available in IDEALS:2014-12-17
Date Deposited:1993

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