Renewable dismissal barriers, job security, and long-term investment: An experimental analysis

This article considers three different types of experimental labor contracts. 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. A 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 that renewable dismissal barriers in the labor market lead to more long-term employment relationships and higher overall productivity. These long-term relationships provide a safer environment for undertaking successful long-term projects. 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 investment). JEL Classification: J41, J3, C91, D01.