A dynamic trading problem is examined in which a monopsonistic employer tries to hire workers whose productivities and reservation wages are private information. The employer can only observe an employee's quality indirectly by monitoring a non-verifiable measure of on-the-job performance. The employer makes contract offers which employees can accept or reject. Once a contract has been accepted it is impossible for the employer to exchange messages with individual employees. On the unique stationary equilibrium path for the contracting game, the employer chooses between two mutually exclusive outcomes. In the market outcome, the employer offers long-term contracts and information is conveyed entirely through self-selection and delayed production. In the monitoring outcome, the employer offers short-term contracts, and contract renegotiation is conditioned by an employee's past performance. A simple characterization theorem is provided which illustrates the often surprising effects of improvements in information in this setting. For example, an employer who is initially offering short-term contracts to exploit performance information may stop monitoring and shift to market screening when the monitoring technology becomes more informative.

In this paper we describe the sequential equilibria of a two-period monopoly with asymmetric information and limited commitment in the market for accident insurance. The role of learning is analyzed; and the possible sequential pooling, semiseparating, and separating equilibria are described (where the probability that a buyer will make a revealing first-period contract choice is equal to zero, is positive, and is equal to one, respectively). In the absence of discounting, we show that only pooling and semiseparating equilibria exist; provide a limited characterization of when these equilibria occur; and show that accident-contingent insurance and accident underreporting occur with positive probability along the equilibrium path of the game.

When workers' search efforts are unobservable, the provision of insurance against firm-specific shocks adversely affects their incentives to find better jobs. In consequence, the equilibrium contract prescribes low wages and underemployment to encourage workers to leave low-productivity firms; and it employs both quits and layoffs to induce separations, with the mix depending both on the relative efficiency of on- and off-the-job search and on the search-incentive effects of layoffs.