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Job Protection Laws and Agency Problems Under Asymmetric Information

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  • Schmitz, Patrick W.

Abstract

Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties’ total surplus. The law restricts the principal’s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal’s possibilities to inefficiently reduce the agent’s rent.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4031.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4031

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Keywords: employment protection; job security; labour market rigidities;

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References

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  1. Saint-Paul, Gilles, 1996. "Employment Protection, International Specialization, and Innovation," CEPR Discussion Papers 1338, C.E.P.R. Discussion Papers.
  2. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
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  6. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
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  8. Michael Peters & Sergei Severinov, 1995. "Competition Among Sellers who offer Auctions Instead of Prices," Working Papers peters-95-02, University of Toronto, Department of Economics.
  9. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  10. Schmitz, Patrick W., 2003. "On second-price auctions and imperfect competition," Journal of Mathematical Economics, Elsevier, vol. 39(8), pages 901-909, November.
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  13. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  14. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
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  16. Levine, David I, 1991. "Just-Cause Employment Policies in the Presence of Worker Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 294-305, July.
  17. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
  18. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  19. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  20. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
  21. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
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Citations

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Cited by:
  1. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Bonn Econ Discussion Papers bgse26_2005, University of Bonn, Germany.
  2. Patrick W. Schmitz, 2005. "Workplace surveillance, privacy protection, and efficiency wages," Bonn Econ Discussion Papers bgse25_2005, University of Bonn, Germany.
  3. Jahn, Elke J. & Wagner, Thomas, 2005. "Contractual Employment Protection and the Scarring Risk of Unemployment," IZA Discussion Papers 1813, Institute for the Study of Labor (IZA).
  4. Niko Matouschek & P Ramezzana & Frédéric Robert-Nicoud, 2008. "Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship," CEP Discussion Papers dp0865, Centre for Economic Performance, LSE.
  5. Espen R. Moen & �sa Rosén, 2006. "Equilibrium Incentive Contracts and Efficiency Wages," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1165-1192, December.

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