This paper presents a theoretical framework in which either long-term or short-term labor contracts arise endogenously. The fundamental trade-off is between firm specific and general human capital. While firm-specific human capital is more productive than general human capital, it cannot be reallocated in response to firm specific shocks. Firm-specific human capital is thus more attractive in environments where firms face less uncertainly about the quality of their projects. When firm-specific human capital is optimal and workers do not have access to perfect financial markets, long-term labor contracts are necessary to decentralize the first-best allocation. Within this framework, we show that `volatility,'' which has no aggregate consequences in economies with general human capital, has large and persistent negative effects in economies with long-term contracts. Volatility is modelled by an aggregate state which determines the accuracy of firms' signals about the quality of their projects. This model therefore sheds light on the sources of the recent stagnation of the Japanese economy. It also provides a rationale for Japan having adopted long-term labor contracts in the 1950's: since imitation is less uncertain than innovation, economies catching up to the frontier are well served by implementing long-term labor contracts
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
677.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:677
Contact details of provider: Postal: Society for Economic Dynamics Anne Stubing CV Starr Center for Applied Economics 269 Mercer Street, Room 303 New York University New York, NY 10003 Fax: 1-860-486-4463 Email: Web page: http://www.EconomicDynamics.org/society.htm More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Christian Zimmermann).