Financing Constraints and Fixed-term Employment Contracts*

This is the authors' abstract. We don't add key points for this paper.

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.