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Why do firms offer ‘employment protection’?

Pissarides, Christopher ORCID: 0000-0002-0695-058X (2010) Why do firms offer ‘employment protection’? Economica, 77 (308). pp. 613-636. ISSN 0013-0427

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Identification Number: 10.1111/j.1468-0335.2010.00861.x


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 and sometimes give notice before dismissal. Severance compensation smooths consumption during employment, and dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay, consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous.

Item Type: Article
Official URL:
Additional Information: © 2010 The London School of Economics and Political Science
Divisions: Economics
Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Date Deposited: 13 Oct 2010 15:44
Last Modified: 13 Nov 2023 22:45

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