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Financing Constraints and Fixed-term Employment Contracts*


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     The authors thank Maria Guadalupe, Maia Güell, Barbara Petrongolo, Steve Pischke, Sara de la Rica, Carmelo Salleo, Ernesto Villanueva, participants to seminars at the Bank of Spain, Federal Reserve Bank of New York, Simposio de Análisis Económico, FEDEA, Universitat de Girona, the European Central Bank and two anonymous referees for their valuable comments and suggestions. All errors are, of course, the authors own responsibility. The authors acknowledge financial support from the Spanish Ministry of Education and Science (grant SEJ2005-03924/ECON) and from the Centre de Referència en Economia Analítica (CREA-Barcelona Economics), and are grateful to Mediocredito-Capitalia research department for having kindly supplied firm level data for this project.


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.