In an environment in which effort is private information to the worker, agreements between a risk-neutral principal and a risk-averse agent are likely to be risk-sharing and information-revealing mechanisms. It is shown that principal-agent contracts have significant implications for both compensation and employment rules in a simple work-sharing model. In general, such contracts involve incomplete income insurance and involuntary or excessive underemployment. This supports the view that models of worker-specific information, particularly with moral hazard, provide a natural explanation of underemployment.

In his recent paper, in this Review, Samuel Bowles (1985) argues that involuntary unemployment in a competitive capitalist economy is an outcome of the Marxian notion of conflict between the firm (capitalist) and workers. The purpose of this comment is not to question the Marxian framework, but simply to argue that the model and examples in Bowles, though very interesting, do not in any cogent way reflect class conflict. Let me list the major points made by Bowles in the context of a competitive capitalist economy: 1) involuntary unemployment, leading to reserve army of the unemployed, is a reflection of class conflict; 2) capitalist technology may be profit maximizing but inefficient; and 3) discrimination among identical workers may be profit maximizing. I will focus primarily on the first observation which is the heart of the paper. The other two can be deduced from the first.