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Threshold effects and firm size: The case of firing costs

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  • Roberto Torrini
  • Fabiano Schivardi

Abstract

We study the role of employment protection legislation (EPL) in determining firm size distribution. In many countries the provisions of EPL are more stringent for firms above certain size thresholds. We construct a simple model that shows that the smooth relation between size and growth probability is broken in proximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset of all Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in terms of discouraging small firms from growing. We find that the probability of growing of firms in the proximity of the threshold is reduced by around 2%. We then construct a stochastic transition matrix for firm size that, together with the estimates, allows for a quantitative evaluation of the effects of EPL in the long run. Our results show that EPL does influence firm size distribution, but that its effects are quantitatively modest: average firm size would increase by less than 1% when removing the threshold effect. Our results suggest that EPL is unlikely to be a major determinant of cross-country differences in firm size.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 445.

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Date of creation: 2004
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Handle: RePEc:red:sed004:445

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Keywords: Firm size distribution; Employment protection; Firing costs.;

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  1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  2. Daron Acemoglu & Joshua D. Angrist, 2001. "Consequences of Employment Protection? The Case of the Americans with Disabilities Act," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 915-957, October.
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  8. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January.
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  10. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
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  13. Patrizio Pagano & Fabiano Schivardi, 2001. "Firm Size Distribution and Growth," Temi di discussione (Economic working papers) 394, Bank of Italy, Economic Research and International Relations Area.
  14. Steven J. Davis & Magnus Henrekson, 1997. "Explaining National Differences in the Size and Industry Distribution of Employment," NBER Working Papers 6246, National Bureau of Economic Research, Inc.
  15. Andrea Ichino & Michele Polo & Enrico Rettore, . "Are Judges Biased by Labor Market Conditions?," Working Papers 192, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. 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.
  17. Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2003. "Comparative Analysis of Firm Demographics and Survival: Micro-Level Evidence for the OECD Countries," OECD Economics Department Working Papers 348, OECD Publishing.
  18. Fabiano Schivardi, 2000. "Rigidita nel mercato del lavoro, disoccupazione e crescita," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 59(1), pages 117-143, April.
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