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Fixed-term employment contracts in an equilibrium search model

  • Alvarez, Fernando
  • Veracierto, Marcelo

We develop a theoretical model of firm dynamics and unemployment and characterize equilibria with tenure dependent separation taxes. The model is a version of the Lucas and Prescott island model with undirected search. Two equivalent decentralizations are considered: one with spot labor markets and one with long-term employment relations. We model “temporary contracts” as the special case of a separation tax that only applies to workers with tenure higher than J. While in principle these contracts require a J-dimensional state space, equilibrium allocations solve a simple dynamic programming problem characterized by two-dimensional inaction set(s).

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 5 ()
Pages: 1725-1753

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:5:p:1725-1753
DOI: 10.1016/j.jet.2012.05.015
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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