Optimal Coexistence of Long-Term and Short-Term Contracts in Labor Markets
AbstractWe consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to successfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the optimal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms operating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers wage. Intermediate firms may (or may not) hire workers through long-term contracts.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 557.
Date of creation: May 2011
Date of revision:
Moral Hazard; long-term contracts; equilibrium contracts;
Other versions of this item:
- Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2011. "Optimal Coexistence of Long-term and Short-term contracts in Labor Markets," UFAE and IAE Working Papers 872.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2011. "Optimal Coexistence of Long-term and Short-term contracts in Labor Markets," Working Papers 11.08, Universidad Pablo de Olavide, Department of Economics.
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-CTA-2012-05-15 (Contract Theory & Applications)
- NEP-HRM-2012-05-15 (Human Capital & Human Resource Management)
- NEP-LAB-2012-05-15 (Labour Economics)
- NEP-PPM-2012-05-15 (Project, Program & Portfolio Management)
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