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An Analysis of the Effects of the Severance Pay Reform on Credit to Italian SMEs

Author

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  • Riccardo Calcagno

    () (Free University and Tinbergen Institute, Amsterdam; CeRP, Turin)

  • Roman Kraeussl

    (Free University of Amsterdam and Center for Financial Studies, Frankfurt am Main)

  • Chiara Monticone

    () (CeRP, Collegio Carlo Alberto, Turin)

Abstract

In this paper we study the effects of the reform of the system of severance indemnities (TFR) currently in use for Italian employees on the cost and the access to credit for Italian small and medium-size enterprises (SMEs). The most direct consequence of the reform will be to reduce the amount of liquid assets available to Italian firms. We argue that this reform, which will produce its first effects in July 2007, will reduce the aggregate investment by SMEs in a more than proportional way in a long run, since it will restrict the access to credit for some of them (Holmstrom and Tirole, 1997). However, we also predict that the reform will not increase the cost of intermediated finance in the long run, coeteris paribus. Nonetheless, in the short-term, if the level of investment by firms can be considered as exogenous, the reform is likely to increase the cost of bank credit for SMEs. In order to perform quantitative estimates of the effect of the reform, we also estimate the future outflows of TFR from the balance sheet of the firms from data covering the whole population of Italian firms.

Suggested Citation

  • Riccardo Calcagno & Roman Kraeussl & Chiara Monticone, 2007. "An Analysis of the Effects of the Severance Pay Reform on Credit to Italian SMEs," CeRP Working Papers 59, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  • Handle: RePEc:crp:wpaper:59
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    Cited by:

    1. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection and Labor Policy and Technical Notes 62726, The World Bank.

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    Keywords

    severance indemnities; moral hazard; credit constraints;

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