When Protection Becomes Exploitation: The Impact of Firing Costs on Present-Biased Employees

Florian Englmaier, Matthias Fahn, Ulrich Glogowski and Marco Schwarz
Additional contact information
Matthias Fahn: JKU Linz
Ulrich Glogowski: JKU Linz
Authors registered in the RePEc Author Service: Ulrich Glogowsky

No 480, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Employment protection harms early-career employees without benefitting them in later career stages (Leonardi and Pica, 2013). We demonstrate that this pattern can result from employers exploiting na¨ıve present-biased employees. Employers offer a dynamic contract with low early-career wages, an unattractive intermediate qualification stage, and high end-of-career wages. Upon reaching the qualification stage, present-biased employees exchange future wages for immediate rewards on an alternative career path – a choice unanticipated by their previous, na¨ıve, self. Thus, employers never pay high future wages. Firing costs help employers indicate that they will not oust employees instead of making promised payments, enabling early-career wage cuts.

Keywords: employment protection laws; present bias; dynamic contracting (search for similar items in EconPapers)
JEL-codes: D21 D90 J33 K31 M52 (search for similar items in EconPapers)
Date: 2023-12-14
New Economics Papers: this item is included in nep-hrm and nep-lma
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Related works:
Working Paper: When Protection Becomes Exploitation: The Impact of Firing Costs on Present-Biased Employees (2023)
Working Paper: When protection becomes exploitation: The impact of firing costs on present-biased employees (2023)
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