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A Structural Model of Tenure and Specific Investments

  • Martin A. van der Ende
  • Coenraad N. Teulings

Though a lot of work has been done on the distribution of job tenures, we are still uncertain about its main determinants. In this paper, we stress random shocks to match productivity after the start of an employment relation. The specificity of investment makes hiring and separation decisions irreversible.These decisions therefore have an option value. Assumptions on riskneutrality, efficient bargaining, and the efficient resolution of hold up problems allow investment and separation decisions to be analyzed separately from wage setting. The tenure profiles in wages implied by the model fit the observed pattern quite well. The model yields a hump shaped pattern in separation rates, similar to learning models, but with a slowerdecline after the peak. Estimation results using job tenure data from the NLSY support this humped shaped pattern and favor this model above the learning model. We develop a methodology to analyze the decomposition of shocks to match productivity into idiosyncratic and macro-level shocks.When assuming a Last-In-First-Out (LIFO) separation rule, this model of individualemployment relations is embedded in a model of firm level employment, that satisfies Gibrat’s law. The LIFO rule is interpreted as an institution protecting the property rights on specific investments of incumbentworkers against hiring new workers by the firm.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 532.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_532
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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  2. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues 92-28, Federal Reserve Bank of Chicago.
  3. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
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  7. Blanchard, O.J. & Diamond, P., 1990. "Ranking, Unemployment Duration, And Wages," Working papers 546, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Boyan Jovanovic & Robert Moffitt, 1990. "An Estimate of a Sectoral Model of Labor Mobility," NBER Working Papers 3227, National Bureau of Economic Research, Inc.
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  12. Holmlund, B. & Zetterberg, J., 1989. "Insider Effects In Wage Determination: Evidence From Five Countries," Papers 1989a, Uppsala - Working Paper Series.
  13. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
  14. Dustmann, Christian & Meghir, Costas, 1999. "Wages, Experience and Seniority," CEPR Discussion Papers 2077, C.E.P.R. Discussion Papers.
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  19. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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  21. repec:cup:cbooks:9780521590730 is not listed on IDEAS
  22. Daniel Parent, 1995. "Wages and Mobility: The Impact of Employer-Provided Training," CIRANO Working Papers 95s-27, CIRANO.
  23. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
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  26. Peter Kuhn & Jacques Robert, 1988. "Seniority and Distribution in a Two-Worker Trade Union," Working Papers 615, Princeton University, Department of Economics, Industrial Relations Section..
  27. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  28. Jovanovic, Boyan, 1979. "Firm-specific Capital and Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1246-60, December.
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