Short or long-term contract? Firm's optimal choice

Paolini, Dimitri;Tena, Juean de Dios
(2012) Empirica —

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  • Paolini, DimitriUCLouvain
    Author
  • Tena, Juean de DiosUniversità degli Studi di Sassari and Universidad Carlos III, Madrid
    Author
Abstract
This article studies the behaviour of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn about the worker. After this stage, the firm can propose a long-term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, it can be optimal for firms to start a working relationship with a short-term contract, but that this policy decreases unemployment and welfare. On the contrary, if the wage is fixed exogenously, this policy could be optimal also from a welfare point of view.
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Paolini, D., & Tena, J. d. D. (2012). Short or long-term contract? Firm’s optimal choice. Empirica. https://doi.org/10.1007/s10663-010-9152-1