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Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts

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  • Pissarides, Christopher A.

    ()
    (London School of Economics)

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 and sometimes give notice before dismissal. Severance compensation smoothes consumption during employment but dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1183.

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Length: 40 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1183

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

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References

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Cited by:
  1. Giulio Fella, 2004. "Optimal severance pay in a matching model," 2004 Meeting Papers 794, Society for Economic Dynamics.
  2. Andersson, Linda, 2008. "Net Taxes,Income Stabilization and Regional Job Flows in Sweden," Working Papers, Örebro University, School of Business 2008:5, Örebro University, School of Business.
  3. Bulent Guler & Fatih Guvenen & Giovanni L. Violante, 2009. "Joint-search theory: new opportunities and new frictions," Staff Report, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
  4. 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.
  5. 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.

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