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Why Do Firms Offer 'Employment Protection'?

  • CHRISTOPHER A. PISSARIDES

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 smooths consumption during employment, and 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. Copyright (c) The London School of Economics and Political Science 2010.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0335.2010.00861.x
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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 77 (2010)
Issue (Month): 308 (October)
Pages: 613-636

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Handle: RePEc:bla:econom:v:77:y:2010:i:308:p:613-636
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  1. Rasmus Lentz & Torben Tranæs, 2002. "Job Search and Savings: Wealth Effects and Duration Dependence," CAM Working Papers 2004-11, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2003.
  2. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  3. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  4. Saint-Paul, Gilles, 1999. "The Political Economy of Employment Protection," CEPR Discussion Papers 2109, C.E.P.R. Discussion Papers.
  5. Lars Ljungqvist & Thomas J. Sargent, 1996. "The European Unemployment Dilemma," EUI-RSCAS Working Papers 36, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  6. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
  7. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  8. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  9. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  10. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
  11. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  12. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  13. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 43-61.
  14. Nickell, Stephen J, 1982. "The Determinants of Equilibrium Unemployment in Britain," Economic Journal, Royal Economic Society, vol. 92(367), pages 555-75, September.
  15. James Costain, 1997. "Unemployment insurance with endogenous search intensity and precautionary saving," Economics Working Papers 243, Department of Economics and Business, Universitat Pompeu Fabra.
  16. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  17. A. A. Sampson, 1978. "Optimal Redundancy Compensation," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 447-452.
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