Premium
Contract Length as Risk Management When Labor is not Homogeneous
Author(s) -
Maxcy Joel G.
Publication year - 2004
Publication title -
labour
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.403
H-Index - 34
eISSN - 1467-9914
pISSN - 1121-7081
DOI - 10.1111/j.1121-7081.2004.00263.x
Subject(s) - incentive , economics , homogeneous , wage , labour economics , production (economics) , implicit contract theory , microeconomics , human capital , term (time) , value (mathematics) , capital (architecture) , labor relations , market economy , history , physics , archaeology , quantum mechanics , machine learning , computer science , thermodynamics
This paper examines the choice of contract length for workers who possess unique skills. Uncertainty, facing both the worker and the firm, creates an incentive to reallocate risk. The uncertainty arises from two sources: variation in the market value of the worker's human capital and fluctuation in the worker's physical production. Long‐term contracts are typically modeled as compensating wage differentials, or as a solution to the problem of asymmetric information. This paper develops a model proposing more complex behavior in the reallocation of risk between the contracting parties. The model shows that long‐term labor contracts are most likely to be observed when price uncertainty in the labor market exceeds the worker's productive uncertainty.