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Job Protection Laws and Agency Problems Under Asymmetric Information

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  • Schmitz, Patrick W

Abstract

Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties’ total surplus. The law restricts the principal’s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal’s possibilities to inefficiently reduce the agent’s rent.

Suggested Citation

  • Schmitz, Patrick W, 2004. "Job Protection Laws and Agency Problems Under Asymmetric Information," CEPR Discussion Papers 4031, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4031
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jahn, Elke J. & Wagner, Thomas, 2005. "Contractual Employment Protection and the Scarring Risk of Unemployment," IZA Discussion Papers 1813, Institute for the Study of Labor (IZA).
    2. Schmitz, Patrick W., 2005. "Workplace surveillance, privacy protection, and efficiency wages," Labour Economics, Elsevier, vol. 12(6), pages 727-738, December.
    3. Espen R. Moen & Åsa Rosén, 2006. "Equilibrium Incentive Contracts and Efficiency Wages," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1165-1192, December.
    4. Schmitz, Patrick W., 2005. "Workplace surveillance, privacy protection, and efficiency wages," Labour Economics, Elsevier, vol. 12(6), pages 727-738, December.
    5. Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2009. "Labor market reforms, job instability, and the flexibility of the employment relationship," European Economic Review, Elsevier, vol. 53(1), pages 19-36, January.
    6. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
    7. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(2), pages 315-329, October.
    8. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(2), pages 315-329, October.

    More about this item

    Keywords

    employment protection; job security; labour market rigidities;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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