Escaping Social Pressure: Fixed-Term Contracts in Multi-Establishment Firms

We investigate the impact of local social pressure against dismissals on the choice of employment contracts made by firms using French linked employer-employee data. Taking into account the potential endogeneity of plant location, we show that establishments located closer to headquarters have higher shares of fixed-term contracts in hiring than those located further away whenever firms' headquarters are located in self-centered communities. We also show that this relationship is driven by firms that are highly visible in the community of the headquarters and whose CEOs not only work but also live there. In contrast, when firms' headquarters belong to communities that are not self-centered, the impact of distance to headquarters on the share of fixed-term contracts turns out to be positive. We show that these findings can only be explained by local social pressure. When the local community at the firm's headquarters is self-centered, CEOs are under pressure to avoid dismissing workers close to headquarters. By adding to the adjustment costs associated with open-ended contracts, this creates an incentive for CEOs to rely more on fixed-term contracts, in an attempt to escape social pressure.