Lamadon, T; (2014) Dynamic contracts and labour market frictions. Doctoral thesis , UCL (University College London).

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Abstract

This thesis studies the effect of repeated and long term relationships between actors engaged in economic markets. Firms hire workers for long periods and offer contracts that evolve over time, and where the history shared with the worker might affect future payments. This thesis shows that understanding the nature and implications of such relationships is central to correctly measure the realized allocation in the market and predict the effects of changes in labour policies. The opening chapter is a theoretical contribution to the repeated games literature. It demonstrates how differences in time preferences between players can be used to sustain equilibrium payoffs that are unattainable under identical discount parameters. This reveals how rich inter-temporal strategies can be utilized to sustain improbable transfers between individuals. The second chapter embeds such a relationship inside an equilibrium where actors randomly meet with each other. It contributes to the literature on labour markets with friction by demonstrating how widely available matched employer-employee data can be used to recover the production function in the economy as well as the assignment of workers to firms. This has important implications for the effectiveness of policies aiming at reallocating workers to more productive jobs. In the final chapter, workers are risk averse and productivity is uncertain. I show that in this context firms choose to offer partial insurance contracts to their workers. The repeated interactions between the firm and the worker are fundamental to understanding how employers choose to transmit part of the uncertainty to the workers. I estimate the model on Swedish data and evaluate the effects of a hypothetical progressive tax aimed at reducing income inequality and uncertainty. The exercise reveals that firms will respond to the policy by transferring more risk to the employees negating around 30% of the direct effect of the policy.

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