New Evidence on Implicit Contracts from Linked Employer-Employee Data

28 Pages Posted: 6 May 2010

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Torsten Santavirta

Aalto University

Date Written: April 28, 2010


We improve the precision of the test of the implicit contract model that Beaudry and DiNardo proposed twenty years ago. Our data set allows us to define the precise industry and plant of a particular employment relationship, link local labour market characteristics and company characteristics to the individual level of wages, and control for composition effects. We find evidence in favour of the spot market model of wage setting in the whole sample, but there is significant variation across industries and educational levels. In particular, the spot market matters most for low-skill workers, while the implicit contract model with one-sided limited commitment applies better to high-skill workers.

Keywords: wage cyclicality, limited commitment, match-specific fixed effects

JEL Classification: E32, J41, J64

Suggested Citation

Kilponen, Juha and Santavirta, Torsten, New Evidence on Implicit Contracts from Linked Employer-Employee Data (April 28, 2010). Bank of Finland Research Discussion Paper No. 12/2010. Available at SSRN: or

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)


Torsten Santavirta

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

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