Working Paper: CEPR ID: DP4031
Authors: Patrick Schmitz
Abstract: Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties? total surplus. The law restricts the principal?s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal?s possibilities to inefficiently reduce the agent?s rent.
Keywords: Employment Protection; Job Security; Labour Market Rigidities
JEL Codes: D82; E24; J65; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Job protection laws (K31) | Employer profit (J32) |
| Job protection laws (K31) | Total surplus (D69) |
| Employer profit (J32) | Total surplus (D69) |