Job Protection Laws and Agency Problems Under Asymmetric Information

Under symmetric information, a job protection law which says that a principal who has hired an agent today must also employ him tomorrow can only reduce the two parties' total surplus. The law restricts the principal's possibilities to maximize her profit, which equals the total surplus, because she leaves no rent to the agent. However, under asymmetric information, a principal must pay a rent to her agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal's possibilities to inefficiently reduce the agent's rent