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Does Uncertainty of Firing Costs Reduce Hirings?
Author(s) -
Chéron Arnaud,
Esselmi Aymen,
Petitrenaud Simon
Publication year - 2011
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.1467-9914.2010.00498.x
Subject(s) - economics , risk aversion (psychology) , elasticity of substitution , substitution (logic) , shock (circulatory) , variance (accounting) , econometrics , investment (military) , sign (mathematics) , elasticity of intertemporal substitution , elasticity (physics) , microeconomics , order (exchange) , function (biology) , expected utility hypothesis , mathematics , production (economics) , mathematical economics , computer science , growth model , materials science , law , mathematical analysis , composite material , biology , accounting , evolutionary biology , political science , medicine , programming language , finance , politics
This paper examines hiring decision under uncertainty of firing costs. We extend the labor demand problem of the firm to account for a random shock that hits the firing cost function. We also consider recursive preferences for the employer in order to separate risk aversion from intertemporal substitution. We find that a rise of the variance of the shock decreases hiring investment if and only if the intertemporal elasticity of substitution is greater than one. The risk aversion parameter does not determine the sign of the uncertainty effect but only its magnitude.