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Coexistence of long-term and short-term contracts

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  • Macho-Stadler, Inés
  • Pérez-Castrillo, David
  • Porteiro, Nicolás

Abstract

We study the length of agreements in a market in which infinitely-lived firms contract with agents that live for two periods. Firms differ in the expected values of their projects, as do workers in their abilities to manage projects. Worker effort is not contractible and worker ability is revealed during the relationship. The market dictates the trade-off between sorting and incentives. Short- and long-term contracts often coexist: The best firms always use short-term contracts to hire high-ability senior workers, firms with less profitable projects use short-term contracts to save on the cost of hiring junior workers, whereas intermediate firms use long-term agreements to provide better incentives to their workers. We relate our results to the optimal assignment literature that follows Becker (1973).

Suggested Citation

  • Macho-Stadler, Inés & Pérez-Castrillo, David & Porteiro, Nicolás, 2014. "Coexistence of long-term and short-term contracts," Games and Economic Behavior, Elsevier, vol. 86(C), pages 145-164.
  • Handle: RePEc:eee:gamebe:v:86:y:2014:i:c:p:145-164 DOI: 10.1016/j.geb.2014.03.013
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    References listed on IDEAS

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    Cited by:

    1. Siegert, Caspar & Trepper, Piers, 2015. "Optimal tolerance for failure," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 41-55.
    2. Roger, Guillaume, 2016. "Participation in moral hazard problems," Games and Economic Behavior, Elsevier, vol. 95(C), pages 10-24.

    More about this item

    Keywords

    Matching; Moral hazard; Contracts; Assignment;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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