Job Protection Laws and Agency Problems Under Asymmetric Information

30 Pages Posted: 11 Jan 2005

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2004

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: Job security, employment protection, labor market rigidities

JEL Classification: D82, E24, J65, K31

Suggested Citation

Schmitz, Patrick W., Job Protection Laws and Agency Problems Under Asymmetric Information (December 2004). CEPR Discussion Paper No. 4031. Available at SSRN: https://ssrn.com/abstract=646762

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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