Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts

Christopher Pissarides

No 1183, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: employment risk; unemployment risk; severance compensation; notice of dismissal (search for similar items in EconPapers)
JEL-codes: E21 E24 J32 J33 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2004-06
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-mac
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts (2002)
Working Paper: Consumption and savings with unemployment risk: implications for optimal employment contracts (2002)
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