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Worker-firm relational contracts in the time of shutdowns: experimental evidence

Linardi, Sera and Camerer, Colin (2021) Worker-firm relational contracts in the time of shutdowns: experimental evidence. Experimental Economics, 24 (4). pp. 1267-1293. ISSN 1386-4157. PMCID PMC7883973. doi:10.1007/s10683-020-09697-1.

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Exogeneous disruptions in labor demand have become more frequent in recent times. The COVID-19 pandemic has resulted in millions of workers being repeatedly laid off and rehired according to local public health conditions. This may be bad news for market efficiency. Typical employment relations—which resemble non-enforceable (implicit) contracts—rely on reciprocity (Brown et al. in Econometrica 72:747–780, 2004), and hence could be harmed when workers’ efforts no longer guarantee reemployment in the next period. In this paper we extend the BFF paradigm to include a per-period probability (0%, 10%, 50%) of publicly observable “shutdown”, where a specific firm cannot contract with any workers for several periods. A Perfect Bayesian Equilibrium exists in which these shutdowns destabilize relationships, but do not harm efficiency. Our experiment shows that, remarkably, market efficiency can be maintained even with very frequent stochastic shutdowns. However, the dynamic of relational contracts changes from one where a worker finds stable employment to one where she juggles multiple employers, laying the burden of maintaining productivity upon workers and worsening worker-side inequality.

Item Type:Article
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Linardi, Sera0000-0002-8085-1555
Camerer, Colin0000-0003-4049-1871
Additional Information:© 2021 Economic Science Association. Received 04 August 2020; Revised 06 December 2020; Accepted 22 December 2020; Published 15 February 2021. The authors would like to thank the following individuals for their excellent research assistance: Erin Carbone, Xiaohong Wang, Jinyong Jeong, Taisuke Imai, Devdeepta Bose. We thank the referees, editors, and participants at seminars for their very useful feedback. We acknowledge the financial support from Behavioral and Neuroeconomics Discovery Fund (via MacArthur Foundation) and grant administration assistance of Tiffany Kim and Alisha Cunniff.
Funding AgencyGrant Number
Behavioral and Neuroeconomics Discovery FundUNSPECIFIED
John D. and Catherine T. MacArthur FoundationUNSPECIFIED
Subject Keywords:Relational contracts; Gift exchange; Labor markets; Unemployment; Shocks; Layoffs; Recession; Repeated game
Issue or Number:4
Classification Code:JEL: J23; J31; J64; C92
PubMed Central ID:PMC7883973
Record Number:CaltechAUTHORS:20210302-145031108
Persistent URL:
Official Citation:Linardi, S., Camerer, C. Worker-firm relational contracts in the time of shutdowns: experimental evidence. Exp Econ 24, 1267–1293 (2021).
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:108275
Deposited By: Tony Diaz
Deposited On:03 Mar 2021 19:31
Last Modified:18 Nov 2021 22:58

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