Short or long-term contract? Firm’s optimal choice
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.
KeywordsSearch Temporary employment Short-term wage
JEL ClassificationJ31 J41 J64
We would like to thank F. Bloch, L. Deidda, S. Perelman, V. Vannetelbosch, and especially G. Bloise and T. Pietra for their helpful comments and discussions. Remaining errors are ours. Financial support of the Italian MIUR is gratefully acknowledged.
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