Notes on Implicit Contracts and the Racial Unemployment Differential

In this article the application of the implicit contract model to black-white inequality is critically evaluated. The discussion revolves around the analysis of Grossman and Trepeta, who view black employment instability as resulting in part from a higher propensity of blacks to renege on implicit contracts. That approach is shown to be theoretically implausible and empirically inconsistent with the data on quit behavior by blacks. As an alternative, a reputational model in which employers have incentives to renege on risk-shifting contracts is discussed.