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Severance Payments as a Commitment Device

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  • Florian Baumann

Abstract

The present paper analyzes the role of severance payments in optimal labor contracts, employing an efficiency-wage model with two-sided moral hazard. We show how employers commit to job security for their workers by using severance payments, but that in general, employees are not fully compensated for the loss in income in the event of a layoff. By extending the analysis we establish a positive relation between investment in firm-specific training and the probability that a worker dismissed for behavioral reasons receives severance payments, and suggest that a mandatory increase in severance payments may yield a Pareto improvement.

Suggested Citation

  • Florian Baumann, 2010. "Severance Payments as a Commitment Device," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(4), pages 715-734, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201012)166:4_715:spaacd_2.0.tx_2-h
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    References listed on IDEAS

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    Cited by:

    1. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2017. "Inside severance pay," Journal of Public Economics, Elsevier, vol. 145(C), pages 211-225.
    2. Ashok Thomas & Luca Spataro, 2013. "Pension funds and Market Efficiency: A review," Discussion Papers 2013/164, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    3. repec:hal:spmain:info:hdl:2441/7hh2up94ii8d2rg9pa9vg9eh3t is not listed on IDEAS

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    More about this item

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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