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 language | English |
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Pages (from-to) | 359-379 |
Number of pages | 21 |
Journal | Labour Economics |
Volume | 2 |
Issue number | 4 |
DOIs | |
State | Published - 1 Jan 1995 |
Externally published | Yes |
Keywords
- Discrete shocks
- Fixed duration
- Labor contracts
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management