Job Matching When Employment Contracts Suffer from Moral Hazard

32 Pages Posted: 11 Nov 2010

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Carsten Helm

University of Oldenburg - Public Economics

Date Written: September 14, 2010

Abstract

We consider a job matching model where the relationships between firms and wealth-constrained workers suffer from moral hazard. Specifically, effort on the job is non-contractible so that parties that are matched negotiate a bonus contract. Higher unemployment benefits affect the workers’ outside option. The latter is improved for low skilled workers. Hence they receive a larger share of the surplus, which strengthens their effort incentives and increases productivity. Effects are reversed for high skilled labor. Moreover, raising benefit payments affects the proportion of successful matches which induces some firms to exit the economy and causes unemployment to increase.

Keywords: Job Matching, Incentive Contracts, Unemployment Benefits, Nash Bargaining, Moral Hazard

JEL Classification: J65, D82, J41, E24

Suggested Citation

Demougin, Dominique and Helm, Carsten, Job Matching When Employment Contracts Suffer from Moral Hazard (September 14, 2010). European Business School Research Paper No. 10-13, Available at SSRN: https://ssrn.com/abstract=1706831 or http://dx.doi.org/10.2139/ssrn.1706831

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

Carsten Helm

University of Oldenburg - Public Economics ( email )

Department of Economics and Law
Oldenburg, 26111
Germany
+49 441 798-4113 (Phone)

HOME PAGE: http://www.fiwi.uni-oldenburg.de/

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