Equilibrium Layoff as Termination of a DynamicContract

In a dynamic model of the labor market with moral hazard, equilibriumlayoff is modeled as termination of an optimal long-term contract. Termination,together with compensation (current and future), is used as an incentive deviceto induce worker efforts. I then use the model to study analytically the effectsof a firing tax on termination and worker compensation and utility. There arethree layers to the impact of a firing tax on layoff and worker utility. A higherfiring tax could either reduce aggregate termination and increase worker utility,or increase aggregate termination and reduce worker utility, depending on thestructure of the environment.[...]