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When Do Firing Costs Matter?

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  • Giulio Fella

    () (Queen Mary and Westfield College, University of London)

Abstract

This paper uses a strategic bargaining framework to reassess the effect of dismissal costs in models of voluntary separation. It shows that firing, as opposed to inducing a quit, is always an off-equilibrium strategy for firms in this class of models. Thus, dismissal costs can affect payoffs only if some exogenous event may force the firm to fire the worker despite it being suboptimal, or if the firm's assets are only partly specific to the relationship. In this latter case, dismissal costs increase the specificity of the firm's capital and depress ex post expected profits. In any case, firing restrictions do not affect separation decisions, as firms always find it profitable to induce workers to quit whenever separation is efficient. Involuntary separation is an essential feature of a world in which firing costs result in a lower probability of separation. In such a world, they may be welfare improving, as the separation rate is inefficiently high in the absence of firing restrictions.

Suggested Citation

  • Giulio Fella, 1999. "When Do Firing Costs Matter?," Working Papers 400, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp400
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    File URL: http://www.econ.qmul.ac.uk/media/econ/research/workingpapers/archive/wp400.pdf
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    Cited by:

    1. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    2. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
    3. Fella, Giulio, 2005. "Termination restrictions and investment in general training," European Economic Review, Elsevier, vol. 49(6), pages 1479-1499, August.
    4. Giulio Fella, 2000. "Investment in General Training with Consensual Layoffs," Working Papers 418, Queen Mary University of London, School of Economics and Finance.
    5. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Coase theorem; Firing costs; Involuntary separation;

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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