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Why do Firms Use Fixed-Term Contracts?
J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets
This paper investigates the reasons why firms use fixed-term contracts. Two distinctive features of these contracts - reduced firing costs and the prohibition of contract rollover - are highlighted. Firms' decisions related to temporary contracts - the choice of the contract on offer and contract conversion - are modeled within standard adjustment costs and matching settings. Regression analysis is performed on the stock of fixed-term contracts and the flows of temporary workers to permanent positions. Results from a beta-binomial regression model indicate that screening workers for permanent positions is the single most important reason why firms use this type of contract.