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Collective Dismissal Cost, Product Market Competition and Innovation

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  • Koeniger, Winfried

    () (Queen Mary, University of London)

Abstract

Collective dismissal costs are an important part of employment protection legislation (EPL) and make firms' exit more costly. We show in a model with step-by-step innovations that dismissal costs spur innovation if product markets are not too competitive: technologically more advanced firms endogenously exit with smaller probability so that there is a dynamic incentive to innovate. But dismissal costs decrease the absolute value of firms and induce exit. These opposite effects and their dependence on the policy mix of EPL and product market regulation explain why empirical studies have difficulties to find a negative effect of EPL on innovation.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 888.

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Length: 31 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:iza:izadps:dp888

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Related research

Keywords: Schumpeterian growth; employment protection legislation; step-by-step innovations; exit cost;

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  1. Giulio Fella, 2000. "Investment in General Training with Consensual Layoffs," Working Papers 418, Queen Mary, University of London, School of Economics and Finance.
  2. Howitt, Peter & Griffith, Rachel & Aghion, Philippe & Blundell, Richard & Bloom, Nick, 2005. "Competition and Innovation: An Inverted-U Relationship," Scholarly Articles 4481507, Harvard University Department of Economics.
  3. Saint-Paul, G., 1995. "Employment Protection, International Specialization, and Innovation," DELTA Working Papers 95-31, DELTA (Ecole normale supérieure).
  4. Andrea Bassanini & Ekkehard Ernst, 2002. "Labour market regulation, industrial relations and technological regimes: a tale of comparative advantage," Industrial and Corporate Change, Oxford University Press, vol. 11(3), pages 391-426, June.
  5. Steven Casper & Henrik Glimstedt, 2001. "Economic Organization, Innovation Systems, and the Internet," Oxford Review of Economic Policy, Oxford University Press, vol. 17(2), pages 265-281, Summer.
  6. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
  7. Levine, David I, 1991. "Just-Cause Employment Policies in the Presence of Worker Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 294-305, July.
  8. Andrea Bassanini & Ekkehard Ernst, 2002. "Labour Market Institutions, Product Market Regulation, and Innovation: Cross-Country Evidence," OECD Economics Department Working Papers 316, OECD Publishing.
  9. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 467-92, July.
  10. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
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