Working Paper: CEPR ID: DP2070
Authors: Roberto Burguet; Ramon Caminal; Carmen Matutes
Abstract: Why do some workers sign contracts with high quitting penalties? Are these restrictions on the workers' mobility perverse for efficiency or workers' welfare? We postulate an answer that hinges on the degree of observability of the worker's performance by alternative employers. When performance is privately observed by the employer, then alternative employers face an adverse selection problem when competing for the worker. In equilibrium separations take the form of layoffs with compensation to the worker with no role for quitting fees. However, if performance is quite public this adverse selection problem is absent and buy-out fees serve to appropriate alternative employer's rents from the reallocation of the worker. In this case, efficiency is not affected. Bargaining power (both before and after signing the contract) determines whether buy-out fees are detrimental or not to the worker's welfare.
Keywords: labour contracts; buyout fees; severance payments
JEL Codes: J41; J44; L14; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contracts with large explicit quitting penalties (J41) | segments of the labor market where worker performance is widely observed (J42) |
| worker performance is widely observed (J29) | adverse selection problems diminish (D82) |
| adverse selection problems diminish (D82) | efficient reallocations of workers (J68) |
| quitting and firing costs (J63) | efficient allocation of workers (J29) |
| quitting and firing costs (J63) | necessary for achieving efficiency (D61) |
| observable performance (C90) | firms can set buyout fees that extract rents from competitors (L13) |
| relative bargaining power at the contracting stage (L14) | distribution of surplus between firms and workers (D33) |
| more bargaining power for workers (J52) | quitting fees enhance their welfare (J26) |
| more bargaining power for firms (L11) | quitting fees extend the firms' market power over time (L11) |
| quitting fees (J26) | regulations against such fees on distributional grounds (D39) |