LIMITED COMMITMENT MODELS OF THE LABOUR MARKET

We present an overview of models of long‐term self‐enforcing labour contracts in which risk‐sharing is the dominant motive for contractual solutions. A base model is developed that is sufficiently general to encompass the two‐agent problem central to most of the literature, including variable hours. We consider two‐sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one‐sided limited commitment problem for which there exists a considerable amount of empirical support.