Job security and long-term projects: The role of dismissal barriers

Abstract

This article analyzes experimentally three different types of labor contracts. The two first types of labor contracts are the standard period-by-period contract and the permanent one. We propose a new type of contract (automatic renewal) in which workers are re-hired if they satisfied the effort level required by the firm. Another novel aspect of our experimental design is that workers have the chance of investing money in a long-term project in order to increase their profits. We find two main results: i) the dismissal barriers in the labor contracts seem to provide a safer institutional setting to undertake long-term projects more successfully; and ii) those workers engaged in a long-term project provided higher effort levels. In sum, we find a strong relationship between what happens inside the labor market (worker’s performance) and what happens outside the labor market (long-term projects).