Contract Length as Risk Management When Labor is not Homogeneous

This paper examines the choice of contract length for workers who possess unique skills. Uncertainty, facing both the worker and the firm, creates an incentive to reallocate risk. The uncertainty arises from two sources: variation in the market value of the worker's human capital and fluctuatio...

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Bibliographic Details
Published in:Labour (Rome, Italy) Italy), 2004-06, Vol.18 (2), p.177-189
Main Author: Maxcy, Joel G.
Format: Article
Language:English
Subjects:
Contracts
Economic theory
Industrial relations
Labor contracts
Labour economics
Labour force
Labour market
Personnel management
Risk management
Studies
Uncertainty
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Summary:This paper examines the choice of contract length for workers who possess unique skills. Uncertainty, facing both the worker and the firm, creates an incentive to reallocate risk. The uncertainty arises from two sources: variation in the market value of the worker's human capital and fluctuation in the worker's physical production. Long‐term contracts are typically modeled as compensating wage differentials, or as a solution to the problem of asymmetric information. This paper develops a model proposing more complex behavior in the reallocation of risk between the contracting parties. The model shows that long‐term labor contracts are most likely to be observed when price uncertainty in the labor market exceeds the worker's productive uncertainty.
ISSN:1121-7081
1467-9914
DOI:10.1111/j.1121-7081.2004.00263.x