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Why do Firms Use Fixed-Term Contracts?

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  • Pedro Portugal
  • José Varejão

Abstract

This paper investigates the reasons why firms use fixed-term contracts. Two distinctive features of these contracts - reduced firing costs and the prohibition of contract rollover - are highlighted. Firms' decisions related to temporary contracts - the choice of the contract on offer and contract conversion - are modeled within standard adjustment costs and matching settings. Regression analysis is performed on the stock of fixed-term contracts and the flows of temporary workers to permanent positions. Results from a beta-binomial regression model indicate that screening workers for permanent positions is the single most important reason why firms use this type of contract.

Suggested Citation

  • Pedro Portugal & José Varejão, 2003. "Why do Firms Use Fixed-Term Contracts?," Working Papers w200308, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200308
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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