Financing constraints and fixed-term employment contracts: empirical appendix, mimeo

This article studies the interactions between financing constraints and the employment decisions of firms when both fixed-term and permanent employment contracts are available. It develops the model of an industry where firms face financing frictions and produce output using both fixed-term and permanent workers. Once calibrated, the model shows that financially constrained firms use fixed-term workers more intensely and make them absorb a larger fraction of the total employment volatility than financially unconstrained firms do. We test and confirm the predictions of the model on a panel data of Italian manufacturing firms with detailed information about financing constraints and the type of workers employed by the firms. The literature on financing constraints has investigated how financial restrictions may affect firms ’ decisions. In particular most of the theoretical and empirical literature has analysed fixed capital investment decisions.1 However, there are very few studies on the effects of financing constraints on the employment policies of firms.2 The payment of wages and firing costs makes hiring and firing sensitive to the financing frictions that firms face. Moreover the dynamic nature of employment decisions also makes firms sensitive to future expected financing constraints. The aim of this article is to propos