Temporary Employees as Real Options

Timothy B. Folta and David A. Foote

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: Choosing between temporary services workers and long-term employees involves a tradeoff between flexibility and commitment. Temporary employees provide both a buffer against unforeseen shocks and a secondary internal labor market to preview employees prior to long-term hire. We use real options theory to diagnose why firms pay premiums for temporary employees and to examine situations in which firms might prefer temporary employees to permanent employees. We believe a real options perspective on temporary employment offers firms more effective management of their human capital decisions, whether to hedge against exogenous shocks or increase valitity and reliability in selection.

Keywords: Temporary employment; real options; selection (search for similar items in EconPapers)
Pages: 36 pages
Date: 1999-08
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1123

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