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Financing Constraints and Fixed-term Employment Contracts

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  • Andrea Caggese
  • Vicente Cuñat

Abstract

This article studies the interactions between financing constraints and the employment decisions of firms when both fixed-term and permanent employment contracts are available. It develops the model of an industry where firms face financing frictions and produce output using both fixed-term and permanent workers. Once calibrated, the model shows that financially constrained firms use fixed-term workers more intensely and make them absorb a larger fraction of the total employment volatility than financially unconstrained firms do. We test and confirm the predictions of the model on a panel data of Italian manufacturing firms with detailed information about financing constraints and the type of workers employed by the firms. Copyright © The Author(s). Journal compilation © Royal Economic Society 2008.

Suggested Citation

  • Andrea Caggese & Vicente Cuñat, 2008. "Financing Constraints and Fixed-term Employment Contracts," Economic Journal, Royal Economic Society, vol. 118(533), pages 2013-2046, November.
  • Handle: RePEc:ecj:econjl:v:118:y:2008:i:533:p:2013-2046
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    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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