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.
Publisher Info
Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
590.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:590
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).
Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)