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Consumption and savings with unemployment risk: implications for optimal employment contracts

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  • Christopher 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 preannounced 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.

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File URL: http://eprints.lse.ac.uk/2211/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 2211.

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Length: 36 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:ehl:lserod:2211

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

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References

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  1. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series 481, Research Institute of Industrial Economics.
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Citations

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Cited by:
  1. Andersson, Linda, 2008. "Net Taxes,Income Stabilization and Regional Job Flows in Sweden," Working Papers 2008:5, Örebro University, School of Business.
  2. 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.
  3. Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 07-02, Utrecht School of Economics.
  4. Bulent Guler & Fatih Guvenen & Giovanni L. Violante, 2009. "Joint-search theory: new opportunities and new frictions," Staff Report 426, Federal Reserve Bank of Minneapolis.
  5. 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.

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