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Termination of Dynamic Contracts in an Equilibrium Labor Market Model

  • Wang, Cheng

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.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12403.

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Date of creation: 25 Jul 2005
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Publication status: Forthcoming in Journal of Economic Theory
Handle: RePEc:isu:genres:12403
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  19. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
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  21. Spear, Stephen E. & Wang, Cheng, 2005. "When to Fire a CEO: Optimal Termination in Dynamic Contracts," Staff General Research Papers 11443, Iowa State University, Department of Economics.
  22. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  23. Rui Zhao, 2001. "On Renegotiation-Proof Contracts in Repeated Agency," Discussion Papers 01-06, University at Albany, SUNY, Department of Economics.
  24. Carmichael, Lorne, 1985. "Can Unemployment Be Involuntary? Comment [Equilibrium Unemployment as a Worker Discipline Device]," American Economic Review, American Economic Association, vol. 75(5), pages 1213-14, December.
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