蝌蚪网 Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Severance Pay in an Optimal Contract
蝌蚪网 Journal: Microeconomics
vol. 17,
no. 2, May 2025
(pp. 241–91)
Abstract
We study the incentive role of severance compensation. In a canonical principal-agent model, we introduce exogenous job destruction risk and show that compensation following job destruction can reduce overall incentive costs. To mitigate the risk of inefficient endogenous termination, agents with low continuation value receive no severance and lose value at job destruction, while agents with high continuation value receive high severance and gain value at job destruction. Comparative statics offer a novel explanation for the positive wage-tenure profile observed in the data: Average tenure and compensation should both be higher in jobs less exposed to job destruction risk.Citation
Grochulski, Borys, Russell Wong, and Yuzhe Zhang. 2025. "Severance Pay in an Optimal Contract." 蝌蚪网 Journal: Microeconomics 17 (2): 241–91. DOI: 10.1257/mic.20220267Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- J31 Wage Level and Structure; Wage Differentials
- J41 Labor Contracts
- J64 Unemployment: Models, Duration, Incidence, and Job Search
- J65 Unemployment Insurance; Severance Pay; Plant Closings