The Employment Contract

19 Pages Posted: 9 Apr 2000

See all articles by Ian Ayres

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Stewart J. Schwab

Cornell Law School

Multiple version iconThere are 2 versions of this paper

Date Written: 1999


This article is an edited transcript of a lecture on the Employment Contract presented to a conference of state law judges. Part I introduces a model of a well-functioning labor market, which provides all employee benefits, and only those employee benefits, that employees value more than it costs employers to provide. Part II articulates ways in which labor markets might fail to provide such cost-justified benefits. Market failures can arise from asymmetric information, asymmetric performance, or collective goods. Such failures can justify legal intervention, although policymakers must worry about the cure being worse than the disease. Additionally, even without market failure policymakers might intervene for paternalistic or distributive reasons. Part III separates out "unequal bargaining power" as an argument for legal intervention, and argues it does not describe a market failure and is generally an incoherent justification for legal intervention.

Part IV applies this framework to evaluate legal erosions of the employment-at-will doctrine. Many courts have upheld claims that a termination breached an implied-in-fact promise not to dismiss a worker without cause. Sometimes, these claims can be justified as correcting problems of opportunism arising from asymmetric performance, problems that vary during the life cycle of a career employee. Contract protections generally are default rules, in that parties can reject them through explicit clauses in a contract. The article articulates the basic theories of default rules, which include mimic-the-market rules and penalty defaults. Other courts have recognized the tort of wrongful discharge in violation of public policy. This tort can be justified as an effort to have employers internalize third-party effects of discharges.

JEL Classification: K31, K12, J41

Suggested Citation

Ayres, Ian and Schwab, Stewart Jon, The Employment Contract (1999). Kansas Journal of Law & Public Policy, Vol. 8, Spring 1999. Available at SSRN: or

Ian Ayres

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Stewart Jon Schwab (Contact Author)

Cornell Law School ( email )

Myron Taylor Hall
Ithaca, NY 14853
United States
607.255.8584 (Phone)
607-255-7193 (Fax)

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