Pareto-improving firing costs?
AbstractWe examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 55 (2011)
Issue (Month): 8 ()
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Web page: http://www.elsevier.com/locate/eer
Implicit contracts; Invisible handshake; Firing costs;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
- J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
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