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Wage Structure in Long-Term Employment Contracts with Imperfect Capital Markets and Asymmetric Information

Mak B. Arvin


Lack of access to borrowing facilities has important implications for wage contracts, especially in recent years when we have witnessed a global financial meltdown with many liquidity-constrained workers unable to borrow from financial institutions. In this paper, we ask whether the workers’ own firm is prepared to lend them money through wages that do not reflect their contemporaneous worth at the firm. We show that asymmetric information about workers’ outside job opportunities will inhibit the firm from providing its employees with a full banking service. Some lending by the firm to its workers, however, does take place – the level of which depends on workers’ degree of risk aversion.


borrowing constraint, lending, employment contracts, structure of earnings, asymmetric information

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