Why do some workers sign contracts with high quitting penalties? Are these restrictions on the workers' mobility perverse for efficiency or workers' welfare? We postulate an answer that hinges on the degree of observability of the worker's performance by alternative employers. When performance is privately observed by the employer, then alternative employers face an adverse selection problem when competing for the worker. In equilibrium separations take the form of layoffs with compensation to the worker with no role for quitting fees. However, if performance is quite public this adverse selection problem is absent and buy-out fees serve to appropriate alternative employer's rents from the reallocation of the worker. In this case, efficiency is not affected. Bargaining power (both before and after signing the contract) determines whether buy-out fees are detrimental or not to the worker's welfare.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2070.
Find related papers by JEL classification: J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
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.:
Gibbons, R. & Katz, L.F., 1989.
"Layoffs And Lemons,"
Working papers
531, Massachusetts Institute of Technology (MIT), Department of Economics.
Other versions:
Robert Gibbons & Lawrence Katz, 1989.
"Layoffs and Lemons,"
Working Papers
629, Princeton University, Department of Economics, Industrial Relations Section..
[Downloadable!]
Robert Gibbons & Lawrence Katz, 1991.
"Layoffs and Lemons,"
NBER Working Papers
2968, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Gibbons, Robert & Katz, Lawrence F, 1991.
"Layoffs and Lemons,"
Journal of Labor Economics,
University of Chicago Press, vol. 9(4), pages 351-80, October.
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