Contractual Fragility, Job Destruction, and Business Cycles

Garey Ramey and Joel Watson

The Quarterly Journal of Economics, 1997, vol. 112, issue 3, 873-911

Abstract: We develop a theory of labor contracting in which negative productivity shocks lead to costly job loss, despite unlimited possibilities for renegotiating wage contracts. Such fragile contracts emerge from firms' trade-offs between robustness of incentives in ongoing employment relationships and costly specific investment. Contractual fragility can serve as a powerful mechanism for propagating underlying productivity shocks: in a simulated matching market equilibrium, i.i.d. shocks are greatly magnified in their effect on market output, and the effect is highly persistent. We also explore novel motivations for government policies that strengthen employment relationships.

Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (114)

Downloads: (external link)
http://hdl.handle.net/10.1162/003355397555370 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:112:y:1997:i:3:p:873-911.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().