Optimal Severance Pay in a Matching Model

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Optimal Severance Pay in a Matching Model

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Giulio Fella () (Queen Mary, University of London)

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Giulio Fella

Abstract

This paper uses an equilibrium matching framework to study jointly the optimal private provision of severance pay and the allocational and welfare consequences of government intervention in excess of private arrangements. Firms insure risk-averse workers by means of simple explicit employment contracts. Contracts can be renegotiated ex post by mutual consent. It is shown that the privately optimal severance payment is bounded below by the fall in lifetime wealth associated with job loss. Simulations show that, despite contract incompleteness, legislated dismissal costs largely in excess of such private optimum are effectively undone by renegotiation and have only a small allocational effect. Welfare falls. Yet, for deviations from laissez faire in line with those observed for most OECD countries, the welfare loss is small.

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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number 598.

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Date of creation: May 2007
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Handle: RePEc:qmw:qmwecw:wp598

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Paper
- Giulio Fella, 2004. "Optimal severance pay in a matching model," 2004 Meeting Papers 794, Society for Economic Dynamics. [Downloadable!]
- Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 07-02, Utrecht School of Economics. [Downloadable!]

Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Fabien Postel-Vinay & Hélène Turon, 2006. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," The Centre for Market and Public Organisation 06/141, Department of Economics, University of Bristol, UK. [Downloadable!]
Other versions:
- Fabien Postel-Vinay & Helene Turon, 2006. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," 2006 Meeting Papers 5, Society for Economic Dynamics.
- Fabien Postel-Vinay & Hélène Turon, 2005. "On-the-job search, productivity shocks, and the individual earnings process," PSE Working Papers 2005-31, PSE (Ecole normale supérieure). [Downloadable!]
- Fabien Postel-Vinay & Hélène Turon, 2006. "On-the-Job Search, Productivity Shocks and the Individual Earnings Process," IZA Discussion Papers 2006, Institute for the Study of Labor (IZA). [Downloadable!]
- Postel-Vinay, Fabien & Turon, Hélène, 2006. "On-The-Job Search, Productivity Shocks and the Individual Earnings Process," CEPR Discussion Papers 5593, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

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