Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts

Christopher Pissarides

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation to smooth consumption during employment without causing moral hazard. A pre-announced delay in dismissal when the job becomes unproductive provides further insurance but because of moral hazard it does not fully smooth consumption. During the delay consumption falls and the worker searches for another job. No delays in dismissals are optimal if exogenous unemployment compensation is sufficiently generous.

Keywords: employment risk; unemployment risk; severance compensation; notice of dismissal (search for similar items in EconPapers)
JEL-codes: E21 E24 J32 J33 (search for similar items in EconPapers)
Date: 2002-08
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Citations: View citations in EconPapers (5)

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https://cep.lse.ac.uk/pubs/download/DP0542.pdf (application/pdf)

Related works:
Working Paper: Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts (2004)
Working Paper: Consumption and savings with unemployment risk: implications for optimal employment contracts (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0542

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