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Why do firms offer ‘employment protection’?

By Christopher Pissarides


This paper derives optimal employment contracts when workers are risk-averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation and sometimes give notice before dismissal. Severance compensation smooths consumption during employment, and dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay, consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous

Topics: HB Economic Theory, HD Industries. Land use. Labor
Publisher: Wiley Blackwell on behalf of the London School of Economics and Political Science
Year: 2010
DOI identifier: 10.1111/j.1468-0335.2010.00861.x
OAI identifier:
Provided by: LSE Research Online
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