We present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders") are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("insiders"). The outsiders do not underbid the insiders since, were they to do so, the insiders would withdraw cooperation from them and make their work unpleasant (that is, "harass" them), thereby reducing the productivity and increasing the reservation wages of the underbidders. The resulting labor turnover costs create economic rent which the insiders tap in wage setting and, as a result, involuntary unemployment may arise.

This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. We show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concern. We also briefly how this inefficiency and free-riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example we interpret the inefficiency in terms of Kornai's "soft budget constraints" within organizations.

This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. The authors show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concerns. They also brief ly discuss how this inefficiency and free riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example, the authors interpret th e inefficiency in terms of Janos Kornai's "soft budget constraints" within organizations.