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Dynamic labor contracts with temporary layoffs and permanent separations

Author

Listed:
  • Sevin Yeltekin

    (Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA)

  • Christopher Sleet

    (Department of Economics, University of Iowa, Iowa City IA 52242, USA)

Abstract

We study the implications of optimal dynamic contracts in private information environments for fluctuations in effort and employment across time and productivity states. To this end, we incorporate temporary layoffs and permanent separations as well as on-the-job effort variations into a dynamic model of moral hazard. We consider two different "commitment" environments. In a "full commitment" environment, although the firm can temporarily lay a worker off, neither party can dissolve the contractual relationship once it has been initiated. On the other hand, in a "limited commitment" environment, both parties can dissolve the relationship at the beginning of any period in order to pursue an outside option. We use our model to study the implications of optimal contracts for incentives, employment histories, layoffs and separations across full information, full commitment and limited commitment settings. We compute solutions to the relevant principal-agent problems, endogenously determining the set of states in which separations occur and the domain of the firm's value function, as well as the value function itself.

Suggested Citation

  • Sevin Yeltekin & Christopher Sleet, 2001. "Dynamic labor contracts with temporary layoffs and permanent separations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 207-235.
    • Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:207-235
    Note: Received: February 28, 2000; revised version: January 21, 2001
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    Citations

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    Cited by:

    1. Eduardo Zilberman & Vinicius Carrasco & Pedro Hemsley, 2019. "Risk sharing contracts with private information and one-sided commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 53-81, July.
    2. Hao Zhang, 2012. "Solving an Infinite Horizon Adverse Selection Model Through Finite Policy Graphs," Operations Research, INFORMS, vol. 60(4), pages 850-864, August.

    More about this item

    Keywords

    Dynamic contracts; Layoffs; Separations.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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