Dynamic labor contracts with temporary layoffs and permanent separations

Sevin Yeltekin () and Christopher Sleet ()
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Christopher Sleet: Department of Economics, University of Iowa, Iowa City IA 52242, USA

Economic Theory, 2001, vol. 18, issue 1, 207-235

Abstract: We study the implications of optimal dynamic contracts in private information environments for fluctuations in effort and employment across time and productivity states. To this end, we incorporate temporary layoffs and permanent separations as well as on-the-job effort variations into a dynamic model of moral hazard. We consider two different "commitment" environments. In a "full commitment" environment, although the firm can temporarily lay a worker off, neither party can dissolve the contractual relationship once it has been initiated. On the other hand, in a "limited commitment" environment, both parties can dissolve the relationship at the beginning of any period in order to pursue an outside option. We use our model to study the implications of optimal contracts for incentives, employment histories, layoffs and separations across full information, full commitment and limited commitment settings. We compute solutions to the relevant principal-agent problems, endogenously determining the set of states in which separations occur and the domain of the firm's value function, as well as the value function itself.

Keywords: Dynamic contracts; Layoffs; Separations. (search for similar items in EconPapers)
JEL-codes: C63 D82 J23 J33 (search for similar items in EconPapers)
Date: 2001-04-11
Note: Received: February 28, 2000; revised version: January 21, 2001
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Citations: View citations in EconPapers (2)

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