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Equilibrium layoff as termination of a dynamic contract

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  • Wang, Cheng

Abstract

In a dynamic model of the labor market with moral hazard, equilibrium layoff is modeled as termination of an optimal long-term contract. Termination, together with compensation (current and future), is used as an incentive device to induce worker efforts. I then use the model to study analytically the effects of a firing tax on termination and worker compensation and utility. There are three layers to the impact of a firing tax on layoff and worker utility. A higher firing tax could either reduce aggregate termination and increase worker utility, or increase aggregate termination and reduce worker utility, depending on the structure of the environment.

Suggested Citation

  • Wang, Cheng, 2006. "Equilibrium layoff as termination of a dynamic contract," ISU General Staff Papers 200612110800001197, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200612110800001197
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