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Title

Golden cages for showy birds: Optimal switching costs in labor contracts

AuthorsBurguet, Roberto ; Caminal, Ramón ; Matutes, Carmen
Issue Date2002
PublisherElsevier
CitationEuropean Economic Review 46(7): 1153-1185 (2002)
AbstractUnder what circumstances do workers sign contracts with high quitting penalties? Our answer points to market transparency. When the worker's performance is privately observed by the incumbent firm, alternative employers face an adverse selection problem. As a result, efficient separations can only take place through involuntary layoffs and there is no role for quitting fees. In contrast, when performance is public, quitting fees are useful devices to appropriate the surplus from worker's reallocation. Separations are amicable and take the form of quitting after downwardly renegotiating the fees. Qualitative features of contracts are independent of the distribution of ex-post bargaining power. The impact of switching costs on total welfare and its distribution depends on the degree of market transparency and the ex-ante distribution of market power. © 2002 Elsevier Science B.V. All rights reserved.
URIhttp://hdl.handle.net/10261/57761
DOI10.1016/S0014-2921(01)00164-7
Identifiersdoi: 10.1016/S0014-2921(01)00164-7
issn: 0014-2921
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