Working Paper: CEPR ID: DP4198
Authors: Roberto Burguet; Ramn Caminal
Abstract: This Paper examines the role of employment protection when firms learn over time about the value of the match. When parties can commit to future wages, equilibrium contracts stipulate positive severance payments as an instrument to induce efficient lay-off decisions and there is no room for public intervention. When parties cannot commit to future wages, ex-post bargaining leads to excessive dismissals, and therefore the market provides insufficient employment protection. In this case, a Pigouvian tax/subsidy scheme will correct the inefficiency by enhancing employment protection.
Keywords: employment protection; experimentation; layoffs; severance payments
JEL Codes: J41; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms can commit to future wages (J33) | Equilibrium contracts stipulate positive severance payments (J65) |
| Equilibrium contracts stipulate positive severance payments (J65) | Efficient layoff decisions (J63) |
| Efficient layoff decisions (J63) | No need for public intervention (H42) |
| Firms cannot commit to future wages (J39) | Excessive dismissals (J63) |
| Excessive dismissals (J63) | Insufficient employment protection (J63) |
| Lack of commitment (J22) | Need for public intervention (H40) |
| Pigouvian tax-subsidy scheme (H23) | Correct inefficiency (D61) |
| Asymmetric information (D82) | Inefficient separations (F12) |