Information Revelation and Principal-Agent Contracts.

In an environment in which effort is private information to the worker, agreements between a risk-neutral principal and a risk-a verse agent are likely to be risk-sharing and information-revealing m echanisms. It is shown that principal-agent contracts have significan t implications for both compensation and employment rules in a simple work-sharing model. In general, such contracts involve incomplete in come insurance and involuntary or excessive underemployment. This sup ports the view that models of worker-specific information, particular ly with moral hazard, provide a natural explanation of underemploymen t. Copyright 1988 by University of Chicago Press.