Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5067255 | European Economic Review | 2011 | 11 Pages |
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.
Related Topics
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Economics and Econometrics
Authors
Bilgehan Karabay, John McLaren,