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Opportunistic Behavior by Firms in Implicit Pension Contracts

Listed author(s):
  • Christopher Cornwell
  • Stuart Dorsey
  • Nasser Mehrzad

Several studies have established that under the most common form of pension coverage, benefits accrue disproportionately near the end of a worker's career. Such backloading establishes a penalty for early quitting but may also create an incentive for opportunistic firm behavior. Because benefits generally are a function of highest earnings, when nominal earnings are expected to rise, an employer can reduce pension liabilities by discharging workers prior to retirement. This paper uses the National Longitudinal Survey of Mature Men to test whether such actions by employers are systematic. We estimate that pension-covered workers with mean losses are less likely to be discharged. Unexpected increases in pension losses due to increases in inflation, however, raise the risk of discharge. We find no evidence that the minimum vesting standards of the Employees' Retirement Income Security Act reduces the likelihood of discharge for older workers who previously were not vested. These results are consistent with an implicit pension contract under which employer compliance is enforced by reputation.

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Article provided by University of Wisconsin Press in its journal Journal of Human Resources.

Volume (Year): 26 (1991)
Issue (Month): 4 ()
Pages: 704-725

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Handle: RePEc:uwp:jhriss:v:26:y:1991:i:4:p:704-725
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