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Privately optimal severance pay

Author

Listed:
  • Fella Giulio

    ()

  • Tyson Christopher J.

    (School of Economics and Finance, Queen Mary University of London, Mile End Road, London E1 4NS, UK)

Abstract

This paper constructs an equilibrium matching model with risk-averse workers and incomplete contracts to study both the optimal private provision of severance pay and the consequences of government mandates in excess of the private optimum. The privately-optimal severance payment is bounded below by the fall in lifetime wealth resulting from job loss. Despite market incompleteness, mandated minimum payments significantly exceeding the private optimum are effectively undone by adjustment of the contractual wage, and have only small allocational and welfare effects.

Suggested Citation

  • Fella Giulio & Tyson Christopher J., 2013. "Privately optimal severance pay," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-39, October.
  • Handle: RePEc:bpj:bejmac:v:13:y:2013:i:1:p:39:n:24
    as

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    References listed on IDEAS

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    7. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
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    Cited by:

    1. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    2. Samuel Danthine & Markus Poschke & Stephane Auray, 2016. "Understanding Severance Pay Determination: Mandates, Bargaining, and Unions," 2016 Meeting Papers 967, Society for Economic Dynamics.
    3. Stéphane Auray & Samuel Danthine & Markus Poschke, 2014. "Mandated versus Negotiated Severance Pay," Working Papers 2014-28, Center for Research in Economics and Statistics.
    4. Kerndler, Martin, 2016. "Contracting frictions and inefficient layoffs of older workers," Annual Conference 2016 (Augsburg): Demographic Change 145711, Verein für Socialpolitik / German Economic Association.
    5. Etienne Lalé, 2014. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Bristol Economics Discussion Papers 14/648, Department of Economics, University of Bristol, UK, revised 16 Aug 2016.
    6. Marco Cozzi & Giulio Fella, 2016. "Job Displacement Risk and Severance Pay," Working Papers 795, Queen Mary University of London, School of Economics and Finance.

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