Abstract

http://ssrn.com/abstract=869437
 
 

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Fixed Term Employment Contracts in an Equilibrium Search Model


Fernando Alvarez


University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Marcelo Veracierto


Federal Reserve Bank of Chicago - Research Department

November 2005

Federal Reserve Bank of Chicago Working Paper No. 2005-14

Abstract:     
Fixed term employment contracts have been introduced in a number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a control problem, whose solution is characterized by two dimensional inaction sets. For J = 1 these contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez-faire case. In a calibrated version of the model, we evaluate to what extent contract lengths similar to those observed in Europe, close the gap between these two extremes.

Number of Pages in PDF File: 81

Keywords: fixed term contracts, temporary contracts, severance payments

JEL Classification: E24, J64, J65

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Date posted: December 13, 2005  

Suggested Citation

Alvarez, Fernando and Veracierto, Marcelo, Fixed Term Employment Contracts in an Equilibrium Search Model (November 2005). Federal Reserve Bank of Chicago Working Paper No. 2005-14. Available at SSRN: http://ssrn.com/abstract=869437 or http://dx.doi.org/10.2139/ssrn.869437

Contact Information

Fernando Alvarez
University of Chicago - Department of Economics ( email )
1126 East 59th Street
Social Science Building, Room 442
Chicago, IL 60637
United States
773-702-4412 (Phone)
773-702-8490 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Marcelo Veracierto (Contact Author)
Federal Reserve Bank of Chicago - Research Department ( email )
230 South LaSalle Street
Chicago, IL 60604-1413
United States
(312) 322-6595 (Phone)
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