Optimal Coexistence of Long-Term and Short-Term Contracts in Labor Markets
We consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to successfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the optimal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms operating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers' wage. Intermediate firms may (or may not) hire workers through long-term contracts.
|Date of creation:||May 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Ramon Trias Fargas, 25-27, 08005 Barcelona|
Phone: +34 93 542-1222
Fax: +34 93 542-1223
Web page: http://www.barcelonagse.eu
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Konstantinos Serfes, 2008. "Endogenous matching in a market with heterogeneous principals and agents," International Journal of Game Theory, Springer;Game Theory Society, vol. 36(3), pages 587-619, March.
- Matutes, Carmen & Regibeau, Pierre & Rockett, Katharine, 1994. "Compensation Schemes and Labor Market Competition: Piece Rate versus Wage Rate," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(2), pages 325-53, Summer.
- Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994.
"Repeated moral hazard: The role of memory, commitment, and the access to credit markets,"
European Economic Review,
Elsevier, vol. 38(8), pages 1527-1553, October.
- Chiappori, P.A. & Macho, I. & Rey, p. & Salanie, B., 1994. "Repeated Moral Hazard: The Role of Memory, Commitment, and the Acces to Credit Markets," Papers 06, Laval - Laboratoire Econometrie.
- Chiappori, P.A. & Macho, I. & Rey, P. & Salanié, B., 1989. "Repeated Moral Hazard: The Role of Memory, Commitment, and the Access to Credit Markets," DELTA Working Papers 89-18, DELTA (Ecole normale supérieure).
- Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
- Patrick Legros & Andrew F. Newman, 2003.
"Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities,"
Economics Working Papers
0030, Institute for Advanced Study, School of Social Science.
- Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
- Patrick Legros & Andrew F. Newman, 2002. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-149, Boston University - Department of Economics, revised Nov 2004.
- Suman Ghosh & Michael Waldman, 2010.
"Standard promotion practices versus up-or-out contracts,"
RAND Journal of Economics,
RAND Corporation, vol. 41(2), pages 301-325.
- Suman Ghosh & Michael Waldman, 2006. "Standard Promotion Practices Versus Up-Or-Out Contracts," Working Papers 06007, Department of Economics, College of Business, Florida Atlantic University.
- Maitreesh Ghatak & Massimo Morelli & Tomas Sjöström, 2001. "Occupational Choice and Dynamic Incentives," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 781-810.
- Marko Terviö, 2009. "Superstars and Mediocrities: Market Failure in the Discovery of Talent -super-1," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 829-850.
- Eng Seng Loh, 1994. "Employment Probation as a Sorting Mechanism," ILR Review, Cornell University, ILR School, vol. 47(3), pages 471-486, April.
When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:557. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruno Guallar)
If references are entirely missing, you can add them using this form.