Worker-firm relational contracts in the time of shutdowns: experimental evidence

Sera Linardi () and Colin Camerer ()
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Sera Linardi: University of Pittsburgh

Experimental Economics, 2021, vol. 24, issue 4, No 8, 1267-1293

Abstract: Abstract Exogeneous disruptions in labor demand have become more frequent in recent times. The COVID-19 pandemic has resulted in millions of workers being repeatedly laid off and rehired according to local public health conditions. This may be bad news for market efficiency. Typical employment relations—which resemble non-enforceable (implicit) contracts—rely on reciprocity (Brown et al. in Econometrica 72:747–780, 2004), and hence could be harmed when workers’ efforts no longer guarantee reemployment in the next period. In this paper we extend the BFF paradigm to include a per-period probability (0%, 10%, 50%) of publicly observable “shutdown”, where a specific firm cannot contract with any workers for several periods. A Perfect Bayesian Equilibrium exists in which these shutdowns destabilize relationships, but do not harm efficiency. Our experiment shows that, remarkably, market efficiency can be maintained even with very frequent stochastic shutdowns. However, the dynamic of relational contracts changes from one where a worker finds stable employment to one where she juggles multiple employers, laying the burden of maintaining productivity upon workers and worsening worker-side inequality.

Keywords: Relational contracts; Gift exchange; Labor markets; Unemployment; Shocks; Layoffs; Recession; Repeated game (search for similar items in EconPapers)
JEL-codes: C92 J23 J31 J64 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10683-020-09697-1

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