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Author: Mehrzad, Nasser
Resulting in 2 citations.
1. Cornwell, Christopher
Dorsey, Stuart
Mehrzad, Nasser
Opportunistic Behavior by Firms in Implicit Pension Contracts
Journal of Human Resources 26,4 (Fall 1991): 704-725.
Cohort(s): Older Men
Publisher: University of Wisconsin Press
Keyword(s): Behavior; Inflation; Pensions; Retirement/Retirement Planning

Several studies have established that under the most common form of pension coverage, benefits accrue disproportionately near the end of a worker's career. Such backloading establishes a penalty for early quitting but many also create an incentive for opportunistic behavior. Because benefits generally are a function of highest earnings, when nominal earnings are expected to rise, an employer can reduce pension liabilities by discharging workers prior to retirement. This paper uses the NLS of Older Men to test whether such actions by employers are systematic. It is estimated that pension-covered workers with mean losses are less likely to be discharged. Unexpected increases in pension losses due to increases in inflation, however, raise the risk of discharge. No evidence was found that the minimum vesting standards of the Employees' Retirement Income Security Act reduces the likelihood of discharge for older workers who previously were not vested. These results are consistent with an implicit pension contract under which employer compliance is enforced by reputation. [MGMT CONTENTS]
Bibliography Citation
Cornwell, Christopher, Stuart Dorsey and Nasser Mehrzad. "Opportunistic Behavior by Firms in Implicit Pension Contracts." Journal of Human Resources 26,4 (Fall 1991): 704-725.
2. Mehrzad, Nasser
Pensions and Implicit Contracts: A Labor Market Test
Ph.D. Dissertation, West Virginia University, 1987
Cohort(s): Older Men
Publisher: UMI - University Microfilms, Bell and Howell Information and Learning
Keyword(s): Layoffs; Pensions

This dissertation tests the strength of implicit pension contracts. Defined benefit pensions base retirement annuities upon final salary with the firm weighted by years of service. Given positive nominal wage growth, vested benefits accrue disproportionately late in the career. This deferral may present the possibility for opportunistic behavior by employers. If workers and firms agree to an implicit contract under which workers assume long tenure with the firm, they will forego current wages at a rate exceeding the actual accumulation of legal pension benefits. The employer may realize a clear short-term benefit by violating this contract. The employer is able to impose pension losses by laying off or by lowering the wage of pension covered workers as they near retirement age. This implication, however, ignores the long-run consequences of such behavior to the firm. Thus whether workers are "cheated" is an empirical question. Are pre-retirement pension covered workers more likely to experience layoffs? The results, using both the Bureau of Labor Statistics' layoff data and the NLS Older Men data, indicate that pensions appear to reduce the likelihood of discharges among pension-covered workers. This finding suggests that firms honor the implicit pension contract. No evidence was found that ERISA has reduced firms' permanent layoffs of pension-covered workers. Thus, firms appear to have honored the contract even prior to the enactment of ERISA. The empirical findings of additional tests using the NLS provide no evidence that firms "cheat" pension-covered workers by delivering lower wages than promised at later stages of worker's career.
Bibliography Citation
Mehrzad, Nasser. Pensions and Implicit Contracts: A Labor Market Test. Ph.D. Dissertation, West Virginia University, 1987.