Double-Sided Moral Hazard in Job Displacement Insurance Contracts
Job displacement insurance typically includes both unemployment benefits and lump-sum severance pay, and each has provoked policy concerns. Unemployment insurance concerns have centered on distorted job search/offer acceptance decisions by the worker, severance-induced firing cost concerns on excessive labor hoarding by firms. A single period private contracting model is used to investigate the interaction of these two seemingly distinct issues. Viewed singly, familiar results emerge. The absence of separation benefits of any kind leads to excessive labor hoarding as a primitive form of earnings insurance. In a limited information environment, the distribution of job displacement insurance between the two benefit types becomes important. Unemployment insurance benefits must be limited (relative to first-best levels) and severance pay made more generous. Firing cost considerations are less familiar. Because the firm wants to provide benefits, they cannot be "contracted around." Although formally driven by the sum of (unsubsidized) severance pay and expected unemployment benefits, the second-best firing cost program limits severance pay only. Together the two constraints create an unpromising contracting environment. The firing cost constraint is the more easily relaxed by government action – subsidies of sufficient size to one or another of the separation programs will work. Offer acceptance requires restrictions on leisure (workfare). Unfortunately, if first-best benefits are mandated, efficiency requires that both be eased.
|Date of creation:||Oct 2011|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Holmlund, Bertil, 1998.
" Unemployment Insurance in Theory and Practice,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 100(1), pages 113-141, March.
- Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," CEPR Discussion Papers 380, Centre for Economic Policy Research, Research School of Economics, Australian National University.
- Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers 1997-25, Uppsala - Working Paper Series.
- Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
- Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
- Kevin F. Hallock, 2009. "Job Loss and the Fraying of the Implicit Employment Contract," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 69-93, Fall.
- Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
- Edi Karni, 1999. "Optimal Unemployment Insurance: A Survey," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 442-465, October.
- E. Galdon-Sanchez, Jose & Guell, Maia, 2003.
"Dismissal conflicts and unemployment,"
European Economic Review,
Elsevier, vol. 47(2), pages 323-335, April.
- José Enrique Galdón Sánchez & Maia Güell, 2001. "Dismissal conflicts and unemployment," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0105, Departamento de Economía - Universidad Pública de Navarra.
- Parsons, Donald O., 2011. "Mandated Severance Pay and Firing Cost Distortions: A Critical Review of the Evidence," IZA Discussion Papers 5776, Institute for the Study of Labor (IZA).
- Addison, John T. & Teixeira, Paulino, 2001.
"The Economics of Employment Protection,"
IZA Discussion Papers
381, Institute for the Study of Labor (IZA).
- Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 423-444, October.
- Parsons, Donald O., 1987. "The employment relationship: Job attachment, work effort, and the nature of contracts," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 14, pages 789-848 Elsevier.
- A. A. Sampson, 1978. "Optimal Redundancy Compensation," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 447-452.
- Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
- Parsons, Donald O., 2010. "The Firing Cost Implications of Alternative Severance Pay Designs," IZA Discussion Papers 4967, Institute for the Study of Labor (IZA).
- Boeri, Tito & Helppie, Brooke & Macis, Mario, 2008. "Labor regulations in developing countries : a review of the evidence and directions for future research," Social Protection and Labor Policy and Technical Notes 46306, The World Bank.
- Viard, Alan D, 2001. " Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump-Sum Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 483-500.
- Canice Prendergast, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 523-534.
- Parsons, Donald O., 2011. "Severance Pay Mandates: Firing Costs, Hiring Costs, and Firm Avoidance Behaviors," IZA Discussion Papers 5876, Institute for the Study of Labor (IZA).
- Martin Neil Baily, 1977. "Unemployment Insurance as Insurance for Workers," ILR Review, Cornell University, ILR School, vol. 30(4), pages 495-504, July.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp6003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.