Fixed-Term Employment Contracts in an Equilibrium Search Model

Fernando Alvarez and Marcelo Veracierto

No 12791, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the effects of fixed-term contracts using a version of the Lucas and Prescott island model with undirected search. A fixed-term contract of length J is modeled as a tax on separations of workers with tenure higher than J . While in principle these policies require a very large state space to analyze the firms and households' problems, we show that equilibrium allocations solve a simple dynamic programming problem. Analyzing this problem we show that equilibrium employment dynamics are characterized by two dimensional inaction sets. Finally, to understand the effect of these contracts, we compare them with two extreme cases: for J = 1 the fixed-term contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez-faire case. In a calibrated version of the model, we find that temporary contracts with J equivalent to three years length close about half of the gap between those two extremes.

JEL-codes: E24 J08 J3 J31 J63 J64 J65 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (10)

Published as Alvarez, Fernando & Veracierto, Marcelo, 2012. "Fixed-term employment contracts in an equilibrium search model," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1725-1753.

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Journal Article: Fixed-term employment contracts in an equilibrium search model (2012)
Working Paper: Fixed term employment contracts in an equilibrium search model (2005)
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