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Why Do Firms Offer 'Employment Protection'?

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  • CHRISTOPHER A. PISSARIDES

Abstract

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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  • Christopher A. Pissarides, 2010. "Why Do Firms Offer 'Employment Protection'?," Economica, London School of Economics and Political Science, vol. 77(308), pages 613-636, October.
  • Handle: RePEc:bla:econom:v:77:y:2010:i:308:p:613-636
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:labeco:v:46:y:2017:i:c:p:64-76 is not listed on IDEAS
    2. Paulo Mota & José Varejão & Paulo Vasconcelos, 2015. "A hysteresis model-based indicator for employment adjustment rigidity," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 547-569, August.
    3. Hendrik Dalen & Kène Henkens, 2013. "Dilemmas of Downsizing During the Great Recession: Crisis Strategies of European Employers," De Economist, Springer, vol. 161(3), pages 307-329, September.
    4. Bolli, Thomas & Kemper, Johanna, 2015. "Evaluating the Impact of Employment Protection on Firm-Provided Training in an RDD Framework," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112895, Verein für Socialpolitik / German Economic Association.
    5. John Martin & Stefano Scarpetta, 2012. "Setting It Right: Employment Protection, Labour Reallocation and Productivity," De Economist, Springer, vol. 160(2), pages 89-116, June.
    6. Parsons, Donald O., 2016. "Moral-Hazard-Free First-Best Unemployment Insurance," IZA Discussion Papers 9824, Institute for the Study of Labor (IZA).
    7. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    8. Mazumder, Debojyoti & Santra, Sattwik, 2009. "Unemployment and Inheritance Linkage: A Dynamic General Equilibrium Analysis," MPRA Paper 57161, University Library of Munich, Germany.
    9. Oikonomou, Rigas, 2013. "Optimal Unemployment Insurance with Private Insurance," MPRA Paper 55726, University Library of Munich, Germany.
    10. Parsons, Donald O., 2014. "Job Displacement Insurance: An Overview," IZA Discussion Papers 8223, Institute for the Study of Labor (IZA).
    11. Conde Ruiz, José Ignacio. & Felgueroso, Florentino. & García Pérez, Jose Ignacio., 2011. "El fondo de capitalización a la austriaca: costes y beneficios de su implantación en España," Economic Reports 06-2011, FEDEA.
    12. repec:bla:manchs:v:85:y:2017:i:4:p:466-490 is not listed on IDEAS

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