TY  - JOUR
AU  - Alvarez,Fernando
AU  - Veracierto,Marcelo
TI  - Fixed-Term Employment Contracts in an Equilibrium Search Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12791
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12791
L1  - http://www.nber.org/papers/w12791.pdf
N1  - Author contact info:
Fernando E. Alvarez
University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-4412
Fax: 773/702-8490
E-Mail: f-alvarez1@uchicago.edu

Marcelo Veracierto
Federal Reserve Bank of Chicago
Research Department
230 South LaSalle Street
Chicago, Illinois 60604
Tel: (312) 322-5695
Fax: (312) 322-2357
E-Mail: mveracie@frbchi.org
AB  - This paper analyzes the effects of fixed-term contracts using a version of the Lucas and Prescott island model with undirected search. A fixed-term contract of length J is modeled as a tax on separations of workers with tenure higher than J . While in principle these policies require a very large state space to analyze the firms and households’ problems, we show that equilibrium allocations solve a simple dynamic programming problem. Analyzing this problem we show that equilibrium employment dynamics are characterized by two dimensional inaction sets. Finally, to understand the effect of these contracts, we compare them with two extreme cases: for J = 1 the fixed-term contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez-faire case. In a calibrated version of the model, we find that temporary contracts with J equivalent to three years length close about half of the gap between those two extremes.
ER  -