Short or long-term contract? : firm's optimal choice Articles uri icon

authors

  • PAOLINI, D.
  • TENA HORRILLO, JUAN DE DIOS

publication date

  • February 2012

start page

  • 1

end page

  • 18

volume

  • 39

international standard serial number (ISSN)

  • 0340-8744

electronic international standard serial number (EISSN)

  • 1573-6911

abstract

  • 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.