Title

Contract length as risk management when labor is not homogeneous

Document Type

Article

Publication Date

6-1-2004

Abstract

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. © 2004 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.

Publication Name

Labour

Volume Number

18

First Page

177

Last Page

189

Issue Number

2

DOI

10.1111/j.1121-7081.2004.00263.x

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