Consumption and savings with unemployment risk: implications for optimal employment contracts.
CEP discussion paper; CEPDP0542,
Centre for Economic Performance, London School of Economics and Political Science, London, UK.
This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation to smooth consumption during employment without causing moral hazard. A preannounced delay in dismissal when the job becomes unproductive provides further insurance but because of moral hazard it does not fully smooth consumption. During the delay consumption falls and the worker searches for another job. No delays in dismissals are optimal if exogenous unemployment compensation is sufficiently generous.
||© 2002 Christopher Pissarides
||employment risk, unemployment risk, severance compensation, notice of dismissal
|Library of Congress subject classification:
||H Social Sciences > HD Industries. Land use. Labor
|Journal of Economic Literature Classification System:
||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits; Private Pensions
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
||Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
||27 Apr 2007
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