Advanced Search
MyIDEAS: Login to save this paper or follow this series

Incomplete self-enforcing labor contracts

Contents:

Author Info

  • Guido Menzio

    ()
    (Economics University of Pennsylvania)

  • Espen Moen

Abstract

We consider a model economy populated by risk-neutral firms with multiple vacancies and risk-averse workers. Following the implicit contract literature, we assume that workers have limited access to the intertemporal trade markets. Following the directed search literature, we assume that unemployed workers choose which firms to visit based on the labor contracts they advertise. Under perfect commitment, the optimal contract between the firm and a worker keeps the worker’s marginal utility constant across dates and states and prescribes that the worker is employed only when employment is ex-post efficient. Also, under perfect commitment, the optimal contract leaves the firm complete discretion to choose the terms of trade offered to future applicants. Therefore, the inflow of new workers is ex-post efficient too. Overall, under perfect commitment, labor contracts create a real wage rigidity that has no allocative effects on labor. Then, we consider an alternative scenario where both firms and workers can leave the employment relationship at any stage and at no cost. Under limited commitment, there is a tension between the goals of insurance provision and recruitment. In those states of the world where the value of the ex-post efficient contract offered to new applicants is lower then the continuation value of the ex-ante optimal contract offered to a senior employee, the firm has an incentive to replace senior with new applicants. The optimal self-enforcing contract efficiently trades-off the goals of insurance and recruitment by prescribing not only what wage the firm should pay its employee at every date and state, but also what contract the firm should offer in the future to new applicants. We show that the optimal self-enforcing contract creates ex-post distortions on the value of the contract offered to new applicants. Most interestingly, we show that for small negative shocks to firm’s productivity, the contract offered to junior and senior employees is identical. The value of this common contract is greater than the value of the ex-post efficient hiring contract. In general equilibrium, this ex-post distortion translates into inefficiently large responses of the unemployment rate to small and negative shocks to aggregate productivity.

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.

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 590.

as in new window
Length:
Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:590

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords: implicit contracts; unemployment fluctuations; directed search;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gertler, Mark & Trigari, Antonella, 2006. "Unemployment fluctuation with staggered Nash wage bargaining," CFS Working Paper Series 2007/09, Center for Financial Studies (CFS).
  2. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  3. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
  4. David M. Arseneau & Sanjay K. Chugh, 2008. "Competitive search equilibrium in a DSGE model," International Finance Discussion Papers 929, Board of Governors of the Federal Reserve System (U.S.).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed006:590. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.