Job matching when employment contracts suffer from moral hazard |
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Authors: | Dominique Demougin Carsten Helm |
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Affiliation: | aEBS University, Department of Governance & Economics, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany;bUniversity of Paris 2, Paris, France;cUniversity of Oldenburg, Department of Economics and Law, 26111 Oldenburg, Germany |
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Abstract: | We consider a job matching model where the relationships between firms and wealth-constrained workers suffer from moral hazard. Specifically, effort on the job is non-contractible so that parties that are matched negotiate a bonus contract. Higher unemployment benefits affect the workers' outside option. The latter is improved for low-skilled workers. Hence they receive a larger share of the surplus, which strengthens their effort incentives and increases productivity. Effects are reversed for high-skilled workers. Moreover, raising benefit payments affects the proportion of successful matches, which induces some firms to exit the economy and causes unemployment to increase. |
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Keywords: | Job matching Incentive contracts Unemployment benefits Nash bargaining Moral hazard |
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