IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Optimal severance pay in a matching model

  • Giulio Fella

This paper extends Mortensen and Pissarides (1994) by introducing workers' risk aversion. In doing so, it provides a framework within which to study jointly the optimal supply of job security and the allocational and welfare consequences of government intervention in excess of private arrangements. Firms offer insurance in the form of simple explicit employment contracts featuring productivity-independent wages and severance pay. Contracts can be renegotiated ex post by mutual consent. Laissez-faire contracts are never renegotiated and fully insure workers. Positive severance payments are part of an optimal contract whenever employed workers enjoy positive rents over their unemployed counterparts. The optimal severance payment size is increasing in the expected income loss associated with job mobility. Hence it is positively related to unemployment duration. We present empirical evidence that legislated job security is positively correlated with the optimal severance pay according to the model. Such evidence cannot be explained in terms of reverse causation from high state-mandated job security to high job duration. Legislated firing costs well in excess of privately optimal ones have negligible welfare effects and a small negative impact on unemployment and its duration as wages fall to minimize the distortion.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.qmul.ac.uk/~ugte176/papers/optsevpay.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://www.qmul.ac.uk/~ugte176/papers/optsevpay.pdf [302 Found]--> http://webspace.qmul.ac.uk/gfella/papers/optsevpay.pdf). If this is indeed the case, please notify (Christian Zimmermann)


File Function: main text
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 794.

as
in new window

Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:794
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Macleod, W.B. & Malcomson, J.M., 1991. "Investments, Hold Up And The Reform Of Market Contracts," Cahiers de recherche 9114, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  3. Leena Rudanko, 2005. "Labor Market Dynamics under Long Term Wage Contracting," 2005 Meeting Papers 876, Society for Economic Dynamics.
  4. Melvyn Coles & Adrian Masters, 2006. "Optimal Unemployment Insurance in a Matching Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 109-138, January.
  5. Christopher Pissarides, 2002. "Consumption and savings with unemployment risk: implications for optimal employment contracts," LSE Research Online Documents on Economics 2211, London School of Economics and Political Science, LSE Library.
  6. Alfonso Rosolia & Gilles Saint Paul, 1998. "The effect of unemployment spells on subsequent wages in Spain," Economics Working Papers 295, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Fredriksson, Peter & Holmlund, Bertil, 1998. "Optimal Unemployment Insurance in Search Equilibrium," Working Paper Series 1998:2, Uppsala University, Department of Economics.
  8. Henry Farber, 2003. "Job Loss in the United States, 1981-2001," NBER Working Papers 9707, National Bureau of Economic Research, Inc.
  9. Daniel Cohen & Arnaud Lefranc & Gilles Saint-Paul, 1997. "French unemployment: a transatlantic perspective," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 265-292, October.
  10. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  11. Fella, Giulio, 2005. "Termination restrictions and investment in general training," European Economic Review, Elsevier, vol. 49(6), pages 1479-1499, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed004:794. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.