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A Structural Model of Tenure and Specific Investments

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  • Martin A. van der Ende
  • Coenraad N. Teulings

Abstract

Though a lot of work has been done on the distribution of job tenures, we are still uncertain about its main determinants. In this paper, we stress random shocks to match productivity after the start of an employment relation. The specificity of investment makes hiring and separation decisions irreversible.These decisions therefore have an option value. Assumptions on riskneutrality, efficient bargaining, and the efficient resolution of hold up problems allow investment and separation decisions to be analyzed separately from wage setting. The tenure profiles in wages implied by the model fit the observed pattern quite well. The model yields a hump shaped pattern in separation rates, similar to learning models, but with a slowerdecline after the peak. Estimation results using job tenure data from the NLSY support this humped shaped pattern and favor this model above the learning model. We develop a methodology to analyze the decomposition of shocks to match productivity into idiosyncratic and macro-level shocks.When assuming a Last-In-First-Out (LIFO) separation rule, this model of individualemployment relations is embedded in a model of firm level employment, that satisfies Gibrat’s law. The LIFO rule is interpreted as an institution protecting the property rights on specific investments of incumbentworkers against hiring new workers by the firm.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 532.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_532

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Keywords: option value; job tenure; tenure profiles;

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References

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Cited by:
  1. Buhai, Sebastian & Teulings, Coen, 2006. "Tenure Profiles and Efficient Separation in a Stochastic Productivity Model," IZA Discussion Papers 1997, Institute for the Study of Labor (IZA).
  2. Grzegorz Kula, 2003. "Retirement with Perfect Insurance," Tinbergen Institute Discussion Papers 03-097/3, Tinbergen Institute.
  3. Pieter A. Gautier & Coen N. Teulings, 2000. "The Right Man for the Job: Increasing Returns in Search?," Econometric Society World Congress 2000 Contributed Papers 0066, Econometric Society.

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