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Threshold effects and firm size: the case of firing costs

  • Fabiano Schivardi
  • Roberto Torrini

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

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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19956.

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Length: 53 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:ehl:lserod:19956
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  1. Saint-Paul, Gilles, 1996. "Employment Protection, International Specialization, and Innovation," CEPR Discussion Papers 1338, C.E.P.R. Discussion Papers.
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