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Coexistence of long-term and short-term contracts

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  • Macho-Stadler, Inés
  • Pérez-Castrillo, David
  • Porteiro, Nicolás

Abstract

We study the length of agreements in a market in which infinitely-lived firms contract with agents that live for two periods. Firms differ in the expected values of their projects, as do workers in their abilities to manage projects. Worker effort is not contractible and worker ability is revealed during the relationship. The market dictates the trade-off between sorting and incentives. Short- and long-term contracts often coexist: The best firms always use short-term contracts to hire high-ability senior workers, firms with less profitable projects use short-term contracts to save on the cost of hiring junior workers, whereas intermediate firms use long-term agreements to provide better incentives to their workers. We relate our results to the optimal assignment literature that follows Becker (1973).

Suggested Citation

  • Macho-Stadler, Inés & Pérez-Castrillo, David & Porteiro, Nicolás, 2014. "Coexistence of long-term and short-term contracts," Games and Economic Behavior, Elsevier, vol. 86(C), pages 145-164.
    • Handle: RePEc:eee:gamebe:v:86:y:2014:i:c:p:145-164
    DOI: 10.1016/j.geb.2014.03.013
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    2. Matsue, Toyoki, 2019. "Employment fluctuations in a dynamic model with long-term and short-term contracts," MPRA Paper 97545, University Library of Munich, Germany.
    3. Basu, Arnab K. & Chau, Nancy H. & Soundararajan, Vidhya, 2021. "Contract employment as a worker discipline device," Journal of Development Economics, Elsevier, vol. 149(C).
    4. Julien, Benoît & Roger, Guillaume, 2018. "Bidding for incentive contracts," Journal of Mathematical Economics, Elsevier, vol. 79(C), pages 95-105.
    5. Olivier Charlot & Idriss Fontaine & Thepthida Sopraseuth, 2019. "Employment Fluctuations, Job Polarization and Non-Standard Work: Evidence from France and the US," THEMA Working Papers 2019-14, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    6. Roger, Guillaume, 2016. "Participation in moral hazard problems," Games and Economic Behavior, Elsevier, vol. 95(C), pages 10-24.
    7. Matsue, Toyoki, 2020. "The impact of short-term employment contracts on employment volatility and economic fluctuations," MPRA Paper 102731, University Library of Munich, Germany.
    8. Inés Macho-Stadler & David Pérez-Castrillo, 2021. "Agency theory meets matching theory," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(1), pages 1-33, March.
    9. Sonedda, Daniela, 2018. "Human capital investment and job creation: the role of the education and production systems," MPRA Paper 91902, University Library of Munich, Germany.

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    More about this item

    Keywords

    Matching; Moral hazard; Contracts; Assignment;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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