Optimal Labor Contracts under Wage and Share Systems

This paper examines optimal labor contracts in a traditional wage system and Weitzman's share system incorporated into the implicit contract model, under symmetric and asymmetric information. In addition, this paper examines whether a share system yields a more efficient solution in terms of employment level than a wage system. When the information is symmetric, the implicit contract theory shows that the maximization problem under both compensation systems yield the same solution as the auction spot market. In the meanwhile, when information is asymmetric incentive compatibility provides the same solutions in both compensation systems, however, they are no longer Pareto optimal, i.e. specifying the inefficient underemployment or overemployment.