Three Essays on Worker Turnover and Incentive Contracts in Labour Market Search Equilibrium

This dissertation thesis consists of three independent research papers and is devoted to the topic of worker turnover and incentive contracts in a labour market characterized by search frictions and matching. There exists a large body of literature dating back to the seminal studies by Diamond, Mortensen and Pissarides, which is analyzing effects of search frictions and productivity fluctuations on the equilibrium flows of workers between employment and unemployment. However workers and firms are typically modeled in an oversimplified way, in particular agency problems, asymmetric information between workers and firms and mutual job attachments are often ignored. Therefore, the primary aim of this dissertation is to consider the interdependence between search frictions in the labour market and agency problems created by asymmetric information within the firm. The core agency problem considered in this dissertation is hidden action on the side of the worker; this can take form of shirking or search-in-attachment, which gives rise to the use of incentive contracts by firms. Introduction of incentive contracts in the model has crucial implications for the amount of worker remuneration, the equilibrium level of unemployment and cross sectional correlation between bonus payments, wages, productivities and separation rates. Model predictions for the correlations between these variables are consistent with the empirical findings.In the context of normative analysis, this dissertation examines the effects of incentive contracts and mutual attachment of workers and firms on the provision of unemployment insurance and social welfare in a decentralized economy. It shows that the use of incentive contracts to deal with the problem of moral hazard has primary relevance for the question of optimal unemployment insurance, while incomplete worker attachment may serve as a source of the equilibrium inefficiency.