Pensions and the implicit contract theory

This dissertation explores an area of pension economics that builds on the finance and labor economics literature. It first tests whether a compensating differential exists between wages and pensions and what type of employment contract underlies this tradeoff. It then analyzes whether the employment contract deters opportunistic behavior by the firm.; The analysis uses two empirical studies to complete this examination of pensions in the labor market. The first uses the 1983 Survey of Consumer Finances, which matches detailed pension information to worker characteristics for a random sample of the population. The pension-wage tradeoff is estimated using both a life-time or contractual model of the labor market and the spot market model used in previous studies. The results indicate a large negative tradeoff in the contractual model but only a negligible tradeoff in the spot market model. Results from estimating the underlying structural supply and demand equation for pensions are also presented.; The second study uses plan-level data on pension plan reversions obtained from the Pension Benefit Guarantee Corporation, as well as information on non-terminated plans from the Department of Labor. This information is then matched to firm-level financial information from Compustat. Assuming that the contractual model underlies the labor market, as supported by the first study, this data set is used to test what type of firms are more likely to terminate their implicit employment contract through pension plan reversions. The results support the contractual model assumptions that firms with higher costs to their reputation are less likely to cheat, but that cheating will occur when firms face unexpected financial gains or are in transitional periods.