Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/20423
Authors: 
Pissarides, Christopher A.
Year of Publication: 
2004
Series/Report no.: 
IZA Discussion paper series 1183
Abstract: 
This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation and sometimes give notice before dismissal. Severance compensation smoothes consumption during employment but dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous.
Subjects: 
employment risk
unemployment risk
severance compensation
notice of dismissal
JEL: 
E24
J32
J33
E21
Document Type: 
Working Paper

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