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Golden Cages for Showy Birds: Optimal Switching Costs in Labour Markets

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Author Info
Burguet, Roberto
Caminal, Ramón
Matutes, Carmen

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Abstract

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.

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Date of creation: Feb 1999
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Handle: RePEc:cpr:ceprdp:2070

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Related research
Keywords: Buy-out Fees; Labour Contracts; Severence Payments;

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
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  1. Jim Leitzel, 1989. "Damage Measures and Incomplete Contracts," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 92-101, Spring. [Downloadable!] (restricted)
  2. Gibbons, R. & Katz, L.F., 1989. "Layoffs And Lemons," Working papers 531, Massachusetts Institute of Technology (MIT), Department of Economics.
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  3. Chung, Tai-Yeong, 1992. "On the Social Optimality of Liquidated Damage Clauses: An Economic Analysis," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(2), pages 280-305, April.
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  4. Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 84-105, Spring. [Downloadable!] (restricted)
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  5. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  6. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 515-39, October. [Downloadable!] (restricted)
  7. Kahn, Charles M, 1985. "Optimal Severance Pay with Incomplete Information," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 435-51, June. [Downloadable!] (restricted)
  8. Hart, Oliver D, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies, Blackwell Publishing, vol. 50(1), pages 3-35, January. [Downloadable!] (restricted)
  9. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," NBER Working Papers 2548, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hashimoto, Masanori, 1981. "Firm-Specific Human Capital as a Shared Investment," American Economic Review, American Economic Association, vol. 71(3), pages 475-82, June. [Downloadable!] (restricted)
  11. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Oxford University Press, vol. 12(4), pages 431-59, December.
  12. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  13. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September. [Downloadable!] (restricted)
  14. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn. [Downloadable!] (restricted)
  15. David M. Cutler & Elizabeth Richardson, 1997. "Measuring the Health of the U.S. Population," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-1), pages 217-282. [Downloadable!]
  16. Laing, Derek, 1994. "Involuntary Layoffs in a Model with Asymmetric Information Concerning Worker Ability," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 375-92, April. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Feess, Eberhard & Frick, Bernd & Muehlheusser, Gerd, 2004. "Legal Restrictions on Buyout Fees: Theory and Evidence from German Soccer," IZA Discussion Papers 1180, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Helmut Dietl & Egon Franck & Markus Lang, 2006. "Why football players may benefit from the "shadow of the transfer system"," Working Papers 0062, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2007. [Downloadable!]
    Other versions:
  3. Feess, Eberhard & Muehlheusser, Gerd, 2002. "Transfer Fee Regulations in European Football," IZA Discussion Papers 423, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Eberhard Feess & Bernd Frick & Gerd Muehlheusser, 2004. "Legal Restrictions on Buyout Fees: Theory and Evidence from German Soccer," Diskussionsschriften dp0411, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  5. Feess, Eberhard & Gerfin, Michael & Muehlheusser, Gerd, 2008. "Contracts as Rent Seeking Devices: Evidence from German Soccer," IZA Discussion Papers 3834, Institute for the Study of Labor (IZA). [Downloadable!]
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