Legal Default Rules: The Case of Wrongful Discharge Laws

56 Pages Posted: 16 Feb 2006  

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Voraprapa Nakavachara

University of Southern California - Department of Economics

Date Written: February 2006

Abstract

One of the most vexing public policy issues is the extent to which governments should intervene into private contractual relationships. The purpose of this paper is to explore both theoretically and empirically the extent to which such interventions may enhance efficiency. In the case of employment law, economists have traditionally taken the view that intervention, such as protection against wrongful discharge, simply undoes the original intent of the parties to the agreement. We find that both the good faith and the implied contract exceptions to employment at will may enhance employment in occupations characterized by high levels of investment. These results suggest that under the appropriate conditions courts may enhance the operation of a competitive market by setting appropriate default remedies for breach of contract.

Keywords: employment law, wrongful discharge, private contracts, default rules

JEL Classification: J11, J21, J31, J61, K12, K31

Suggested Citation

MacLeod, W. Bentley and Nakavachara, Voraprapa, Legal Default Rules: The Case of Wrongful Discharge Laws (February 2006). IZA Discussion Paper No. 1970. Available at SSRN: https://ssrn.com/abstract=884473

William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Voraprapa Nakavachara

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

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