nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒06‒07
three papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Job Security as an Endogenous Job Characteristic By Jahn, Elke J.; Wagner, Thomas
  2. Coalition Governments and Policy Reform with Asymmetric Information By Carsten Helm; Michael Neugart
  3. Labor Market Reforms, Job Instability, and the Flexibility of the Employment Relationship By Niko Matouschek; P Ramezzana; Frédéric Robert-Nicoud

  1. By: Jahn, Elke J. (Department of Economics, Aarhus School of Business); Wagner, Thomas (University of Applied Sciences)
    Abstract: This paper develops a hedonic model of job security (JS). Workers with heterogeneous JS-preferences pay the hedonic price for JS to employers, who incur labor-hoarding costs from supplying JS. In contrast to the Wage-Bill Argument, equilibrium unemployment is strictly positive, as workers with weak JS-preferences trade JS for higher wages. The relation between optimal job insecurity and the perceived dismissal probability is hump-shaped. If firms observe demand, but workers do not, separation is not contractible and firms dismiss workers at-will. Although the workers are risk-averse, they respond to the one-sided private information by trading wage-risk for a higher JS. With two-sided private information, even JS-neutral workers pay the price for a JS guarantee, if their risk premium associated with the wage-replacement risk is larger than the social net loss from production.
    Keywords: job security; hedonic market; implicit contract theory; guaranteed employment contract; severance pay contract; asymmetric information; prudence
    JEL: D86 J41 J65 K31
    Date: 2008–04–01
  2. By: Carsten Helm (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Michael Neugart (Free University of Bozen/Bolzano, School of Management and Economics)
    Abstract: With ideological parties being better informed about the state of the world than voters, the true motivation of policy proposals is hard to judge for the electorate. However, if reform proposals have to be agreed upon by coalition parties, it may become possible for the government to signal to the voters its private information about the necessity of reforms. Therefore, in coalition governments reforms will be more in line with policy requirements than in single-party governments. This is usually beneficial for the coalition parties as well as for the voter.
    Keywords: Asymmetric information, coalition governments, policy reform
    JEL: D72 D78 D82
    Date: 2008–05
  3. By: Niko Matouschek; P Ramezzana; Frédéric Robert-Nicoud
    Abstract: We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.
    Keywords: search, bargaining, asymmetric information, labor market reform
    JEL: J41 D82
    Date: 2008–04

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