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Bankruptcy and the difficulty of firing

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  • Nicolae Stef

Abstract

Firms may use layoffs as an ex ante mechanism to avoid filing for bankruptcy. However, the national labor law may impose some restrictions that delay or hamper the firing decision of the employer. This study proposes a different legal pathway for policymakers whose goal is to reduce the use of bankruptcy without acting on the design of the bankruptcy law. Using a sample of 33 countries from 2007 to 2015, we show that the total amount of firing restrictions leads to more bankruptcies. The employer's legal obligation to notify a third party prior the dismissal of one employee tends to increase the number of bankruptcies. It is very likely that the employer's rescue strategy endures an intense ex post monitoring of the employment contracts and/or a strong legal opposition to the layoff decision from such third party. In addition, labor codes that apply priority rules in case of reemployment can increase the use of bankruptcy.

Suggested Citation

  • Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," EconomiX Working Papers 2017-26, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2017-26
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    File URL: http://economix.fr/pdf/dt/2017/WP_EcoX_2017-26.pdf
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    More about this item

    Keywords

    Bankruptcy; Layoff; Labor.;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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