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Equilibrium Layoff As Termination of a Dynamic Contract

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  • Wang, Cheng

Abstract

In a dynamic model of the labor market with moral hazard, equilibrium layoff is modeled as termination of an optimal long-term contract. Termination, together with compensation (current and future), is used as an incentive device to induce worker efforts. I then use the model to study analytically the effects of a firing tax on termination and worker compensation and utility. There are three layers to the impact of a firing tax on layoff and worker utility. A higher firing tax could either reduce aggregate termination and increase worker utility, or increase aggregate termination and reduce worker utility, depending on the structure of the environment.

Suggested Citation

  • Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers Archive 12704, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12704
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    File URL: http://www2.econ.iastate.edu/papers/p3862-2006-12-11.pdf
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    References listed on IDEAS

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