Escaping social pressure: Fixed-term contracts in multi-establishment firms

Abstract

We investigate the impact of local social pressure against dismissals on the choice of employment contracts made by firms using French linked employer-employee data. Taking into account the potential endogeneity of plant location, we show that establishments located closer to headquarters have higher shares of fixed-term contracts in hiring than those located further away whenever firms' headquarters are located in self-centred communities. We also show that this relationship is driven by firms that are highly visible in the community of the headquarters and whose CEOs not only work but also live there. In contrast, we find no such evidence for firms with headquarters located in outwardlooking communities. We show that these findings can only be explained by local social pressure. When the local community at the firm's headquarters is self-centred, CEOs are under pressure to avoid dismissing workers close to headquarters. By adding to the adjustment costs associated with permanent contracts, this creates an incentive for CEOs to rely more on fixed-term contracts, in an attempt to escape social pressure.

Heavy is the Crown: CEOS' Social Interactions and Layoff Decisions

“…only to maximise its contribution to the firm market potential 6 -see Appendix A.1 for a description of the method. Bassanini et al (2021) show that this potential distance is a valid instrument, i.e. that it affects the outcome variable only through actual distance, and is therefore unrelated with any unobserved plant-specific characteristics that may affect this outcome after conditioning on actual distance.…”

“…The social distance between CEOs and their employees is hardly observable. However, using the French Contact entre les personnes ("Contact between people") survey, Bassanini et al (2021) show that social relations decrease with geographical distance between individuals. As a consequence, we hypothesise:…”

“…A.1 Derivation of the Instrument Bassanini et al (2021) instrument the distance between one establishment and its headquarters by the potential distance defined as the distance between the headquarters and the place where the establishment would have been located (its potential location) had this location been chosen only to maximise its contribution to the firm market potential (irrespective of other plant characteristics). This instrument is built following the procedure presented hereafter.…”