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Extension of labor contracts and optimal backpay

  • Danziger, Leif

This paper explains why a union and a firm might settle on a contract duration that may later be extended and characterizes the optimal backpay for the holdout period. It is shown that the choice between concluding a shorter contract that may be extended and immediately concluding a longer contract depends on the prevalence of the different types of uncertainty in the economy. It is also shown that the optimal backpay reduces the negative impact of nominal uncertainty on a worker’s real income, but increases the worker’s exposure to idiosyncratic uncertainty.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 15 (2008)
Issue (Month): 1 (February)
Pages: 18-36

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Handle: RePEc:eee:labeco:v:15:y:2008:i:1:p:18-36
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
  2. Cramton, Peter C & Tracy, Joseph S, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," American Economic Review, American Economic Association, vol. 82(1), pages 100-121, March.
  3. Danziger, Leif, 1995. "Contract Reopeners," Journal of Labor Economics, University of Chicago Press, vol. 13(1), pages 62-87, January.
  4. Houba, Harold & Bolt, Wilko, 2000. "Holdouts, backdating and wage negotiations," European Economic Review, Elsevier, vol. 44(9), pages 1783-1800, October.
  5. James M. Malcomson, 1997. "Contracts, Hold-Up, and Labor Markets," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 1916-1957, December.
  6. Danziger, Leif & Neuman, Shoshana, 2003. "Delays in Renewal of Labor Contracts: Theory and Evidence," IZA Discussion Papers 709, Institute for the Study of Labor (IZA).
  7. Leaf Danziger, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 435-440.
  8. van Ours, Jan C. & van de Wijngaert, Rob F., 1996. "Holdouts and wage bargaining in The Netherlands," Economics Letters, Elsevier, vol. 53(1), pages 83-88, October.
  9. Louis Christofides & Amy Chen Peng, 2003. "Contract Duration and Indexation in a Period of Real and Nominal Uncertainty," CESifo Working Paper Series 994, CESifo Group Munich.
  10. Robert W. Rich & Joseph Tracy, 2000. "Uncertainty and labor contract durations," Staff Reports 106, Federal Reserve Bank of New York.
  11. Peter Cramton & Joseph S. Tracy, 1994. "The Determinants of U.S. Labor Disputes," Papers of Peter Cramton 94jole, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  12. van Ours, Jan C., 1999. "The cyclical behavior of holdout durations," Economics Letters, Elsevier, vol. 62(3), pages 365-370, March.
  13. Harris, Milton & Holmstrom, Bengt, 1987. "On the Duration of Agreements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 389-406, June.
  14. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  15. Christofides, Louis N, 1990. "The Interaction between Indexation, Contract Duration and Non-contingent Wage Adjustment," Economica, London School of Economics and Political Science, vol. 57(227), pages 395-409, August.
  16. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
  17. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November.
  18. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography 0305001, EconWPA.
  19. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  20. Murphy, Kevin J., 2000. "What effect does uncertainty have on the length of labor contracts?," Labour Economics, Elsevier, vol. 7(2), pages 181-201, March.
  21. Wallace, Frederick H, 2001. "The Effects of Shock Size and Type on Labor-Contract Duration," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 658-81, July.
  22. Danziger, Leif, 1992. "On the Prevalence of Labor Contracts with Fixed Duration," American Economic Review, American Economic Association, vol. 82(1), pages 195-206, March.
  23. Kevin J. Murphy, 1992. "Determinants of Contract Duration in Collective Bargaining Agreements," ILR Review, Cornell University, ILR School, vol. 45(2), pages 352-365, January.
  24. Ronald G. Ehrenberg & Leif Danziger & Gee San, 1982. "Cost-of-Living Adjustment Clauses in Union Contracts," NBER Working Papers 0998, National Bureau of Economic Research, Inc.
  25. Wallace, Frederick H. & Blanco, Herminio, 1991. "The effects of real and nominal shocks on union-firm contract duration," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 361-380, June.
  26. Dye, Ronald A, 1985. "Optimal Length of Labor Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 251-70, February.
  27. Gu, Wulong & Kuhn, Peter, 1998. "A Theory of Holdouts in Wage Bargaining," American Economic Review, American Economic Association, vol. 88(3), pages 428-49, June.
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