Discrete shocks and fixed duration of labor contracts

Research output: Contribution to journalArticlepeer-review


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
Issue number4
StatePublished - 1 Jan 1995
Externally publishedYes


  • Discrete shocks
  • Fixed duration
  • Labor contracts

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management


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