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Threshold Effects and Firm Size: the Case of Firing Costs

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  • Fabiano Schivardi
  • Roberto Torrini

Abstract

We study the role of employment protection legislation (EPL) in determining firm size distribution. In manycountries the provisions of EPL are more stringent for firms above certain size thresholds. We construct asimple model that shows that the smooth relation between size and growth probability is interrupted inproximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset ofall Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in termsof discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of thethreshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, wecompute the long-run effects of EPL on size distribution. We find that average firm size would increase by lessthan 1% in steady state when removing the threshold; a quantitatively modest effect.

Suggested Citation

  • Fabiano Schivardi & Roberto Torrini, 2004. "Threshold Effects and Firm Size: the Case of Firing Costs," CEP Discussion Papers dp0633, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0633
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    Cited by:

    1. Thomas K. Bauer & Stefan Bender & Holger Bonin, 2007. "Dismissal Protection and Worker Flows in Small Establishments," Economica, London School of Economics and Political Science, vol. 74(296), pages 804-821, November.
    2. Koller, Lena & Schnabel, Claus & Wagner, Joachim, 2005. "Arbeitsrechtliche Schwellenwerte und betriebliche Arbeitsplatzdynamik: Eine empirische Untersuchung am Beispiel des Schwerbehindertengesetzes," Discussion Papers 38, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    3. Alex Coad, 2007. "Firm Growth: a Survey," Post-Print halshs-00155762, HAL.
    4. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    5. Boockmann, Bernhard & Gutknecht, Daniel & Steffes, Susanne, 2008. "Die Wirkung des Kündigungsschutzes auf die Stabilität "junger" Beschäftigungsverhältnisse (The effect of dismissal protection legislation on the stability of newly started employment relatio," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 347-364.
    6. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, vol. 15(3), pages 482-511, June.
    7. Caggese, Andrea, 2007. "Testing financing constraints on firm investment using variable capital," Journal of Financial Economics, Elsevier, vol. 86(3), pages 683-723, December.
    8. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    9. Nicoletta Corrocher & Lucia Cusmano & Camilla Lenzi, 2013. "Growth in Knowledge-Intensive Business Services: Evidence from Lombardy," Industry and Innovation, Taylor & Francis Journals, vol. 20(6), pages 563-584, August.
    10. Elisabetta Trevisan, 2008. "Enforcement of Employment Protection and the hiring behaviour of firms. Evidence from a large Italian region," Working Papers 2008_25, Department of Economics, University of Venice "Ca' Foscari".
    11. Julián Messina & Giovanna Vallanti, 2007. "Job Flow Dynamics and Firing Restrictions: Evidence from Europe," Economic Journal, Royal Economic Society, vol. 117(521), pages 279-301, June.
    12. Koller, Lena, 2005. "Arbeitsrechtliche Schwellenwerte: Regelungen an der Schwelle zur Unüberschaubarkeit," Discussion Papers 40, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    13. Bernhard Boockmann & Daniel Gutknecht & Susanne Steffes, 2008. "Effects of Dismissal Protection Legislation on Individual Employment Stability in Germany," IAW Discussion Papers 45, Institut für Angewandte Wirtschaftsforschung (IAW).
    14. Marco Leonardi & Giovanni Pica, 2007. "Employment Protection Legislation and Wages," CSEF Working Papers 175, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    15. Koller, Lena & Schnabel, Claus & Wagner, Joachim, 2006. "Arbeitsrechtliche Schwellenwerte und betriebliche Arbeitsplatzdynamik : eine empirische Untersuchung am Beispiel des Schwerbehindertengesetzes (Labour-law thresholds and employment dynamics in firms :," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 39(2), pages 181-199.
    16. Boockmann, Bernhard & Gutknecht, Daniel & Steffes, Susanne, 2008. "Die Wirkung des Kündigungsschutzes auf die Stabilität "junger" Beschäftigungsverhältnisse (The effect of dismissal protection legislation on the stability of newly started employment relatio," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 347-364.
    17. Kanika Kapur & Pinar Karaca‐Mandic & Susan M. Gates & Brent Fulton, 2012. "Do Small‐Group Health Insurance Regulations Influence Small Business Size?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 231-260, March.
    18. Boockmann, Bernhard & Gutknecht, Daniel & Steffes, Susanne, 2008. "Die Wirkung des Kündigungsschutzes auf die Stabilität "junger" Beschäftigungsverhältnisse (The effect of dismissal protection legislation on the stability of newly started employment relatio," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 41(2/3), pages 347-364.
    19. Mincheol Choi & Chang‐Yang Lee, 2020. "The Peter Pan syndrome for small and medium‐sized enterprises: Evidence from Korean manufacturing firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 426-445, April.
    20. Koller, Lena & Schnabel, Claus & Wagner, Joachim, 2006. "Arbeitsrechtliche Schwellenwerte und betriebliche Arbeitsplatzdynamik : eine empirische Untersuchung am Beispiel des Schwerbehindertengesetzes (Labour-law thresholds and employment dynamics in firms :," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 39(2), pages 181-199.
    21. von Below, David & Thoursie, Peter Skogman, 2010. "Last in, first out?: Estimating the effect of seniority rules in Sweden," Labour Economics, Elsevier, vol. 17(6), pages 987-997, December.

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    More about this item

    Keywords

    Firm size distribution; Employment protection; Firing costs;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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