Discrete shocks and fixed duration of labor contracts

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the choice between fixed and stochastic durations of labor contracts in an economy with discrete shocks. The stochastic duration expires when the consumer price index reaches a lower or upper limit. The paper proves that any contract with a stochastic duration is dominated by a contract with a fixed duration, except for the contract that expires at the first shock. This is because shocks have a cumulative effect and a fixed duration limits the time a contract can remain in force after a large number of shocks, while there is no time limit with a stochastic duration.

Original languageEnglish
Pages (from-to)359-379
Number of pages21
JournalLabour Economics
Volume2
Issue number4
DOIs
StatePublished - 1 Jan 1995
Externally publishedYes

Keywords

  • Discrete shocks
  • Fixed duration
  • Labor contracts

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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