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Termination of Dynamic Contracts in an Equilibrium Labor Market Model

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  • Wang, Cheng

Abstract

I construct an equilibrium model of the labor market where workers and firms enter into dyamic contracts that can potentially last forever, but are subject to optimal terminations. Upon a termination, the firm hires a new worker, and the worker who is terminated receives a termination compensation from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two typical kinds of labor market separations observed in practice: involuntary layoffs and voluntary retirements. The model allows simultaneous determination of its equilibrium turnover, unemployment, and retirement, as well as the expected utility of the new labor market entrants.

Suggested Citation

  • Wang, Cheng, 2005. "Termination of Dynamic Contracts in an Equilibrium Labor Market Model," Staff General Research Papers Archive 12403, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:12403
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    File URL: http://www2.econ.iastate.edu/papers/p3837-2005-07-25.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jacek Rothert, 2015. "Monitoring, moral hazard, and turnover," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 355-374, February.
    2. Cheng Wang, 2012. "Optimal Self-enforcing and Termination," 2012 Meeting Papers 433, Society for Economic Dynamics.
    3. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers Archive 12704, Iowa State University, Department of Economics.
    4. Wang, Cheng & Yang, Youzhi, 2015. "Equilibrium matching and termination," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 208-229.
    5. Wang, Cheng & Yang, Youzhi, 2015. "Outside opportunities and termination," Games and Economic Behavior, Elsevier, vol. 91(C), pages 207-228.
    6. Yang, Youzhi, 2009. "Essays on Repated Moral Hazard," ISU General Staff Papers 200901010800001746, Iowa State University, Department of Economics.
    7. Hiroshi Osano & Keiichi Hori, 2015. "A Dynamic Agency Theory of Investment and Managerial Replacement," KIER Working Papers 921, Kyoto University, Institute of Economic Research.
    8. repec:eee:inecon:v:111:y:2018:i:c:p:190-213 is not listed on IDEAS

    More about this item

    Keywords

    dynamic contract; termination; labor market equilibrium;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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