Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/34116
Year of Publication: 
2006
Series/Report no.: 
IZA Discussion Papers No. 2367
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We analyze the role of damage clauses in labor contracts using a model in which a worker may want to terminate his current employment relationship and work for another firm. We show that the initial parties to a contract have an incentive to stipulate excessive damage clauses, which leads to ex post inefficiencies. This result is due to rent seeking motives a) between the contracting parties vis-à-vis third parties and b) among the contracting parties themselves. We then show that, by imposing an upper bound on the amount of enforceable damages, a regulator can induce a Pareto improvement; in some cases even the first best can be achieved
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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