This paper clarifies how the loss of profits by quit-related work force disturbances and the endogeneity of the length of contracts play a critical role in determination of the compensation structure. Such a loss of profits is demonstrated to be a necessary and sufficient condition which induces (non-vested) pensions and mandatory retirement synchronously. Mandatory (or pensioned) retirement, however, does not always entail upward-tilted wage profiles except in the firms in which workers' quitting creates a serious work force disturbance. The optimal length of contract is determined as a function of market opportunities and firm-specific characteristics. Finally, based on our analysis, policy implications in Japan's contemporary industrial relations are derived.
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