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Opportunistic Behavior by Firms in Implicit Pension Contracts

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  • Christopher Cornwell
  • Stuart Dorsey
  • Nasser Mehrzad

Abstract

Several studies have established that under the most common form of pension coverage, benefits accrue disproportionately near the end of a worker's career. Such backloading establishes a penalty for early quitting but may also create an incentive for opportunistic firm behavior. Because benefits generally are a function of highest earnings, when nominal earnings are expected to rise, an employer can reduce pension liabilities by discharging workers prior to retirement. This paper uses the National Longitudinal Survey of Mature Men to test whether such actions by employers are systematic. We estimate that pension-covered workers with mean losses are less likely to be discharged. Unexpected increases in pension losses due to increases in inflation, however, raise the risk of discharge. We find no evidence that the minimum vesting standards of the Employees' Retirement Income Security Act reduces the likelihood of discharge for older workers who previously were not vested. These results are consistent with an implicit pension contract under which employer compliance is enforced by reputation.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Journal of Human Resources.

Volume (Year): 26 (1991)
Issue (Month): 4 ()
Pages: 704-725

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Handle: RePEc:uwp:jhriss:v:26:y:1991:i:4:p:704-725

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Web page: http://jhr.uwpress.org/

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Cited by:
  1. Alan L. Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, 1993. "The Role of Pensions in the Labor Market," NBER Working Papers 4295, National Bureau of Economic Research, Inc.
  2. Leora Friedberg & Michael T. Owyang & Tara M. Sinclair, 2006. "Searching for better prospects: endogenizing falling job tenure and private pension coverage," Working Papers 2003-038, Federal Reserve Bank of St. Louis.
  3. David Neumark & Steven A. Sharpe, 1992. "Hostile Takeovers and Expropriation of Extramarginal Wages: A Test," NBER Working Papers 4101, National Bureau of Economic Research, Inc.
  4. David Neumark, 2008. "The Age Discrimination in Employment Act and the Challenge of Population Aging," NBER Working Papers 14317, National Bureau of Economic Research, Inc.
  5. David Neumark & Joanne Song, 2011. "Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?," NBER Working Papers 17467, National Bureau of Economic Research, Inc.
  6. Leora Friedberg & Michael Owyang, 2004. "Explaining the Evolution of Pension Structure and Job Tenure," NBER Working Papers 10714, National Bureau of Economic Research, Inc.
  7. Robert L. Clark & Joseph F. Quinn, 1999. "Effects of Pensions on Labor Markets and Retirement," Boston College Working Papers in Economics 431, Boston College Department of Economics.

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