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Optimal Severance Pay in a Matching Model

Author

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  • Giulio Fella

    (Queen Mary, University of London)

Abstract
This paper uses an equilibrium matching framework to study jointly the optimal private provision of severance pay and the allocational and welfare consequences of government intervention in excess of private arrangements. Firms insure risk-averse workers by means of simple explicit employment contracts. Contracts can be renegotiated ex post by mutual consent. It is shown that the privately optimal severance payment is bounded below by the fall in lifetime wealth associated with job loss. Simulations show that, despite contract incompleteness, legislated dismissal costs largely in excess of such private optimum are effectively undone by renegotiation and have only a small allocational effect. Welfare falls. Yet, for deviations from laissez faire in line with those observed for most OECD countries, the welfare loss is small.

Suggested Citation

  • Giulio Fella, 2007. "Optimal Severance Pay in a Matching Model," Working Papers 598, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:598
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2007/items/wp598.pdf
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    References listed on IDEAS

    as
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    15. repec:pri:cepsud:89farber is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Fabien Postel-Vinay & Hélène Turon, 2010. "On-The-Job Search, Productivity Shocks, And The Individual Earnings Process," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 599-629, August.
    2. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    3. repec:spo:wpmain:info:hdl:2441/5l6uh8ogmqildh09h4823espg is not listed on IDEAS
    4. Dennis Wesselbaum, 2014. "Firing tax vs severance payments – an unequal comparison," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(5), pages 721-736, September.
    5. Alain Delacroix & Etienne Wasmer, 2009. "Layoff Costs and Efficiency with Asymmetric Information," SciencePo Working papers Main hal-00972915, HAL.
    6. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
    7. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h4823espg is not listed on IDEAS
    8. Luz Adriana Flórez, 2014. "Optimal Policy with Informal Sector and Endogenous Savings," Borradores de Economia 833, Banco de la Republica de Colombia.
    9. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h4823espg is not listed on IDEAS
    10. Michau, Jean-Baptiste, 2015. "Optimal labor market policy with search frictions and risk-averse workers," Labour Economics, Elsevier, vol. 35(C), pages 93-107.
    11. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2010. "The effects of employment protection legislation and financial market imperfections on investment: evidence from a firm-level panel of EU countries [Technology and labour regulations]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(61), pages 117-163.
    12. Saltari, Enrico & Tilli, Riccardo, 2009. "The role and significance of endogenous firing costs in a matching model with endogenous job destruction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(5), pages 799-808, October.
    13. Egbert Jongen & Sabine Visser, 2010. "Exploring the ambiguous impact of employment protection on employment and productivity," CPB Discussion Paper 148, CPB Netherlands Bureau for Economic Policy Analysis.
    14. repec:hal:wpspec:info:hdl:2441/5l6uh8ogmqildh09h4823espg is not listed on IDEAS
    15. Alain Delacroix & Etienne Wasmer, 2009. "Layoff Costs and Efficiency with Asymmetric Information," Sciences Po publications info:hdl:2441/5l6uh8ogmqi, Sciences Po.

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    More about this item

    Keywords

    Severance pay; Contracts; Renegotiation;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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