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Labour makets with turnover costs and fixed wage contracts: a general equilibrium model

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  • Larsen, J.D.J.

Abstract

This paper investigates the effects of linear turnover costs in employment in a competitive general equilibrium framework. with linear turnover costs, the Williamson (1975) hold-up issue can arise and firms may invest inefficiently. A renegotiable fixed wage contract can, as described by MacLeod and Malcomson (1993), establish efficient employment and investment decisions. A computable general equilibrium model with these features is constructed and analysed theoretically and quantitatively. As in the risk insurance literature, it is found that fixed wage contracts dampen the fluctuations in the average wage and ensure that the correlation between output and wages is less than perfect. Relative to the risk insurance approach to contracts, this offers an alternative extension and improvement of the standard competitive general equilibrium models.

Suggested Citation

  • Larsen, J.D.J., 1997. "Labour makets with turnover costs and fixed wage contracts: a general equilibrium model," Discussion Paper Series In Economics And Econometrics 9706, Economics Division, School of Social Sciences, University of Southampton.
  • Handle: RePEc:stn:sotoec:9706
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    References listed on IDEAS

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    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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