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Worker-firm relational contracts in the time of shutdowns: experimental evidence
Published online by Cambridge University Press: 14 March 2025
Abstract
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.
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- Copyright © 2021 Economic Science Association
Footnotes
Supplementary information The online version contains supplementary material available at (https://doi.org/10.1007/s10683-020-09697-1).
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.