Working Paper: CEPR ID: DP3367
Authors: Christopher Pissarides
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; notice of dismissal; severance compensation; unemployment risk
JEL Codes: E21; E24; J32; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal employment contracts (J41) | severance compensation (J65) |
| severance compensation (J65) | consumption smoothing (D15) |
| severance compensation (J65) | mitigate adverse effects of unemployment risk (J65) |
| preannounced delay in dismissal (J63) | further insurance (G52) |
| preannounced delay in dismissal (J63) | decline in consumption during delay (D15) |