“Termination of Dynamic Contracts in an Equilibrium Labor Market Model” by Cheng WANG
Iowa State University
I construct an equilibrium model of the labor market where workers and firms enter into dynamic contracts that can potentially last forever, but are subject to optimal terminations. Upon a termination, the firm hires a new worker, and the worker who is terminated receives a termination compensation from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two typical kinds of labor market separations observed in practice: involuntary layoffs and voluntary retirements. The model allows simultaneous determination of its equilibrium turnover, unemployment, and retirement, as well as the expected utility of the new labor market entrants.