Pensions and Indenture Premia

Abstract

The implicit pension contract has provided a theoretical basis for the observed relation between pensions, less quitting and earlier retirement. But it also has encountered difficulty explaining why wages seem "too high" in pension firms. This anomaly has been taken by some to imply that efficiency wages, not pension capital losses, explain why quitting is abnormally low in defined benefit pensions. In this paper, I pursue an alternative explanation, that the implicit contract model is oversimplified because it ignores supply conditions facing long-tenure firms. I show that once an allowance is made for compensation required by workers for entering long-term labor contracts, numerous anomalous empirical observations in the pension market are explicable.

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