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Downsizing

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  • Gerard A. Pfann

Abstract

Optimal layoff rules in closed form are derived for all workers in a firm that downsizes under uncertainty and faces heterogeneous firing costs. The theoretical model predicts that the firm displaces workers with low firing costs, low expected future productivity growth, and low layoff option values. The empirical analysis based on personnel records from a Dutch aircraft building company that went bankrupt in 1996 shows that workers with high uncertainty associated with higher than average expected productivity growth are most likely to be retained.

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Bibliographic Info

Paper provided by Harris School of Public Policy Studies, University of Chicago in its series Working Papers with number 0110.

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Date of creation: Apr 2001
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Handle: RePEc:har:wpaper:0110

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Keywords: downsizing; layoff; personnel;

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References

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  1. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  2. Edward P. Lazear, 1995. "Hiring Risky Workers," NBER Working Papers 5334, National Bureau of Economic Research, Inc.
  3. Nickell, S J, 1978. "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(180), pages 329-45, November.
  4. Paul Oyer & Scott Schaefer, 2000. "Layoffs and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 345-358, Summer.
  5. Hamermesh, Daniel S, 1987. "The Costs of Worker Displacement," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 51-75, February.
  6. Topel, Robert H & Ward, Michael P, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 439-79, May.
  7. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 1-29, February.
  8. Lori G. Kletzer, 1998. "Job Displacement," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 115-136, Winter.
  9. Jovanovic, Boyan, 1979. "Firm-specific Capital and Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1246-60, December.
  10. Joseph G. Altonji & Charles R. Pierret, . "Employer Learning and Statistical Discrimination," IPR working papers 97-18, Institute for Policy Resarch at Northwestern University.
  11. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  12. Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
  13. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  15. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
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Cited by:
  1. Hartmut Lehmann & Kaia Phillips & Jonathan Wadsworth, 2002. "The Incidence and Cost of Job Loss in a Transition Economy: Displaced Workers in Estonia, 1989-1999," CERT Discussion Papers 0209, Centre for Economic Reform and Transformation, Heriot Watt University.
  2. Sunde, Uwe, 2002. "Unobserved Bilateral Search on the Labor Market: A Theory-Based Correction for a Common Flaw in Empirical Matching Studies," IZA Discussion Papers 520, Institute for the Study of Labor (IZA).

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