Advanced Search
MyIDEAS: Login to save this paper or follow this series

Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts

Contents:

Author Info

  • Christopher A. Pissarides

Abstract

This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation to smooth consumption during employment without causing moral hazard. A pre-announced delay in dismissal when the job becomes unproductive provides further insurance but because of moral hazard it does not fully smooth consumption. During the delay consumption falls and the worker searches for another job. No delays in dismissals are optimal if exogenous unemployment compensation is sufficiently generous.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://cep.lse.ac.uk/pubs/download/DP0542.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0542.

as in new window
Length:
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:cep:cepdps:dp0542

Contact details of provider:
Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: employment risk; unemployment risk; severance compensation; notice of dismissal;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lars Ljungqvist & Thomas J. Sargent, 1996. "The European Unemployment Dilemma," EUI-RSCAS Working Papers 36, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  2. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  3. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-96, December.
  4. Rasmus Lentz & Torben Tranaes, 2001. "Job Search and Savings: Wealth Effects and Duration Dependence," CESifo Working Paper Series 461, CESifo Group Munich.
  5. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  6. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  7. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
  8. Sampson, A A, 1978. "Optimal Redundancy Compensation," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 447-52, October.
  9. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 43-61.
  10. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
  11. Wang, Cheng & Williamson, Steve, 1996. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Staff General Research Papers 5088, Iowa State University, Department of Economics.
  12. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  13. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  14. Williamson, S. & Wang, C., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Working Papers 95-09, University of Iowa, Department of Economics.
  15. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  16. Bertola, Giuseppe, 1999. "Microeconomic perspectives on aggregate labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 45, pages 2985-3028 Elsevier.
  17. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  18. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-59, December.
  19. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
  20. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  21. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  22. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
  23. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  24. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-57, October.
  25. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  26. Mortensen, Dale T & Pissarides, Christopher A, 1999. "Unemployment Responses to 'Skill-Biased' Technology Shocks: The Role of Labour Market Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 242-65, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Giovanni L. Violante & Fatih Guvenen & Bulent Guler, 2008. "Joint-Search Theory: New Opportunities and New Frictions," 2008 Meeting Papers 856, Society for Economic Dynamics.
  2. Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 07-02, Utrecht School of Economics.
  3. Blanchard, Olivier & Tirole, Jean, 2006. "The Joint Design of Unemployment Insurance and Employment Protection: A First Pass," IDEI Working Papers 258, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Olivier Blanchard & Jean Tirole, 2004. "The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass," NBER Working Papers 10443, National Bureau of Economic Research, Inc.
  5. Andersson, Linda, 2008. "Net Taxes,Income Stabilization and Regional Job Flows in Sweden," Working Papers 2008:5, Örebro University, School of Business.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0542. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.