Short or long-term contract? Firm’s optimal choice

TitleShort or long-term contract? Firm’s optimal choice
Publication TypeJournal Article
Year of Publication2012
AuthorsPaolini, D, Tena, JD

This article studies the behaviour of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn about the worker. After this stage, the firm can propose a long-term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, it can be optimal for firms to start a working relationship with a short-term contract, but that this policy decreases unemployment and welfare. On the contrary, if the wage is fixed exogenously, this policy could be optimal also from a welfare point of view.

Keywordssearch, short-term wage, temporary employment