Job Protection Laws and Agency Problems Under Asymmetric Information

Patrick Schmitz

No 4031, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties? total surplus. The law restricts the principal?s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal?s possibilities to inefficiently reduce the agent?s rent.

Keywords: Job security; Employment protection; Labour market rigidities (search for similar items in EconPapers)
JEL-codes: D82 E24 J65 K31 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-law, nep-mac, nep-mic and nep-reg
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Citations: View citations in EconPapers (12)

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Journal Article: Job protection laws and agency problems under asymmetric information (2004)
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