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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/
File Function: Open access version.
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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. Rasmus Lentz & Torben Tranaes, 2001. "Job Search and Savings: Wealth Effects and Duration Dependence," CESifo Working Paper Series 461, CESifo Group Munich.
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  3. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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  8. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
  9. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
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  18. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
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  21. Sampson, A A, 1978. "Optimal Redundancy Compensation," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 447-52, October.
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Citations

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Cited by:
  1. Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 07-02, Utrecht School of Economics.
  2. Blanchard, Olivier J & Tirole, Jean, 2007. "The Joint Design of Unemployment Insurance and Employment Protection. A First Pass," CEPR Discussion Papers 6127, C.E.P.R. Discussion Papers.
  3. Bulent Guler & Fatih Guvenen & Giovanni L. Violante, 2009. "Joint-Search Theory: New Opportunities and New Frictions," NBER Working Papers 15011, National Bureau of Economic Research, Inc.
  4. 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.
  5. Andersson, Linda, 2008. "Net Taxes,Income Stabilization and Regional Job Flows in Sweden," Working Papers 2008:5, Örebro University, School of Business.

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