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This paper analyzes the effects of fixed-term contracts using a version of the Lucas and Prescott island model with undirected search. A fixed-term contract of length J is modeled as a tax on separations of workers with tenure higher than J. While in principle these policies require a very large state space to analyze the firms and households' problems, the authors show that equilibrium allocations solve a simple dynamic programming problem. Analyzing this problem they show that equilibrium employment dynamics are characterized by two dimensional inaction sets.
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