Implicit Contract Theory: A Reexamination and Reformulation

摘要

The analysis in this study integrates concepts from the recent literature on implicit contract theory, firm specific human capital theory and internal labor market theory in an attempt to better explain the pattern of both temporary and permanent layoffs that are observed empirically. The study proceeds in two major stages. The first stage reexamines implicit contract theory and finds that the explanation of the labor market on the basis of implicit contract theory is incomplete. In particular, contract theory fails to emphasize the long term, intertemporal nature of the employment relation that is motivated by the mutual advantages to firm and workers in developing long term attachments. This emphasis on the permanency of the employment relation is one of the fundamental precepts of firm specific human capital theory and internal labor market theory and integrating this concept into the implicit contract framework allows us to reformulate implicit contract theory in the second stage of this research. In this second stage, the incentives for layoffs are examined in the reformulated framework and the different circumstances under which temporary and permanent layoffs occur are distinguished. In addition, the interaction between the optimal determination of the compensation structure of the firm and the incentives for layoffs is considered.