Consumption and savings with unemployment risk: implications for optimal employment contracts

Christopher Pissarides

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 preannounced 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)
Pages: 36 pages
Date: 2002-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://eprints.lse.ac.uk/2211/ Open access version. (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:ehl:lserod:2211

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