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Termination of Dynamic Contracts in an Equilibrium Labor Market Model

  • Cheng Wang

    ()

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 Society for Economic Dynamics in its series 2005 Meeting Papers with number 743.

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Date of creation: 2005
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Handle: RePEc:red:sed005:743
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  13. Dilip Abreu & David Pearce & Ennio Stacchetti, 2010. "Towards a Theory of Discounted Repeated Games with Imperfect Monitoring," Levine's Working Paper Archive 199, David K. Levine.
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  16. Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers 5170, Iowa State University, Department of Economics.
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  20. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
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  27. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  28. Ray Debraj, 1994. "Internally Renegotiation-Proof Equilibrium Sets: Limit Behavior with Low Discounting," Games and Economic Behavior, Elsevier, vol. 6(1), pages 162-177, January.
  29. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1990. "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring," Econometrica, Econometric Society, vol. 58(5), pages 1041-63, September.
  30. 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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