[PEN-L:34232] short vs. long-run contracts

["Devine, James" <jdevine@xxxxxxx>]

Sabri writes: >Did you know about Fundenberg, Holmstrom and Milgrom paper about long
versus short term contracts, for example? Using heavy mathematics
they "prove" that there is no difference between having a long
term contract and a sequence of short term contracts. That means,
don't worry, be happy, even when you have no job security. <

I haven't seen that paper, but it's prima facie absurd. The equivalent theory in finance says that there is no difference between having a long-term bond and a sequence of short-term bonds rolled over from period to period. (This is the "expectations hypothesis," for issues such as treasury bills & bonds that don't differ in terms of inherent risk.) But it doesn't work in the real world, despite the fact that financial markets are 100 times more like the idealized market than labor-power markets are. Long-term bonds have to pay higher interest rates than the average of actual and expected short-term bonds to compensate financial investors for extra risk & illiquidity.

Of course long-term labor contracts may involve fewer pecuniary rewards than similar short-term contracts, because the latter have the non-pecuniary benefit of security. But that doesn't make them the same.
------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine