This chapter reviews recent developments in the study of individual employment contracts. It discusses three reasons for an employer and an employee to have a contract: (i) to allocate risk in a way different from a spot market; (2) to enhance the efficiency of investment decisions by protecting...

Risk-neutral individuals take more risky decisions when they have limited liability. Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire information before taking decisions. Limited liability makes it optimal to increase the reward for outcomes...

Workers will not pay for general on-the-job training if contracts are not enforceable. Firms may if there are mobility frictions. Private information about worker productivities, however, prevents workers who quit receiving their marginal products elsewhere. Their new employers then receive...