We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the 'invisible handshake') in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments. (C) 2011 Elsevier B.V. All rights reserved.
Pareto-improving firing costs? / Karabay, Bilgehan; Mclaren, John. - In: EUROPEAN ECONOMIC REVIEW. - ISSN 0014-2921. - 55:8(2011), pp. 1083-1093. [10.1016/j.euroecorev.2011.04.008]
Pareto-improving firing costs?
Karabay, Bilgehan;
2011-01-01
Abstract
We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the 'invisible handshake') in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments. (C) 2011 Elsevier B.V. All rights reserved.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione
