Just‐cause provisions,severance pay,and the efficiency wage hypothesis

A simple model of employment contracting is employed to examine the effectiveness of just‐cause provisions in alleviating employer opportunism in two types of efficiency wage contracts—standard contracts, in which wages exceed the worker's marginal contribution, and deferred wages, which are paid after a period of tenure in the firm. It is argued that just‐cause employment policies are necessary and sufficient to prevent employer opportunism when standard efficiency wages are utilized. However, just‐cause policies are not sufficient to deter employer opportunism when employment contracts are of the delayed‐payment type. In these contracts, other contractual provisions, such as severance provisions, are also necessary. Copyright © 2000 John Wiley & Sons, Ltd.