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On the Prevalence of Labor Contracts with Fixed Duration

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  • Danziger, Leif

Abstract

The prevalence of labor contracts with fixed duration seems surprising. Why is a fixed duration preferred to a stochastic duration that depends on the consumer price index? In this paper, the specification of the contract duration is determined endogenously. The wage rate can be indexed to the consumer price index, but there is a loss since the indexation must be the same for different types of shocks. This loss increases with the variability of the contract duration. Since the loss due to the contracting cost depends on the expected discounted duration only, a fixed duration is chosen. Copyright 1992 by American Economic Association.

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  • Danziger, Leif, 1992. "On the Prevalence of Labor Contracts with Fixed Duration," American Economic Review, American Economic Association, vol. 82(1), pages 195-206, March.
    • Handle: RePEc:aea:aecrev:v:82:y:1992:i:1:p:195-206
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    Cited by:

    1. Panu Poutvaara & Tuomas Takalo & Andreas Wagener, 2017. "The Optimal Duration of Contracts," CESifo Working Paper Series 6808, CESifo.
    2. Leif Danziger & Shoshana Neuman, 2005. "Delays in Renewal of Labor Contracts: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 341-372, April.
    3. Danziger, Leif, 2008. "Extension of labor contracts and optimal backpay," Labour Economics, Elsevier, vol. 15(1), pages 18-36, February.
    4. Danziger, Leif, 1995. "Discrete shocks and fixed duration of labor contracts," Labour Economics, Elsevier, vol. 2(4), pages 359-379, December.
    5. Alejandro Rodríguez Arana, 2002. "Ajustes discontinuos de salarios, inflación y fluctuaciones económicas," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 17(1), pages 129-161.

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