Working Paper: NBER ID: w15627
Authors: Ant Bozkaya; William R. Kerr
Abstract: European nations substitute between employment protection regulations and labor market expenditures (e.g., unemployment insurance benefits) for providing worker insurance. Employment regulations more directly tax firms making frequent labor adjustments than other labor insurance mechanisms. Venture capital and private equity investors are especially sensitive to these labor adjustment costs. Nations favoring labor expenditures as the mechanism for providing worker insurance developed stronger private equity markets in high volatility sectors over 1990-2004. These patterns are further evident in US investments into Europe. In this context, policy mechanisms are more important than the overall insurance level provided.
Keywords: labor regulations; private equity; venture capital; employment protection; labor market expenditures
JEL Codes: G24; J21; J65; L26; M13; O31; O32; O52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stricter EPRs (P30) | lower PE investment entry (G31) |
| higher levels of LME (I25) | increased PE investments in volatile sectors (G31) |
| shift from EPRs towards LMEs (E69) | significant increase in probability of PE entry in high volatility industries (L19) |
| shift from EPRs towards LMEs (E69) | 20% increase in the number of deals in high volatility sectors (G24) |
| mechanisms of labor insurance provision (J08) | understanding PE investment dynamics (G11) |
| US-sourced venture capital investments (G24) | sensitivity to labor insurance mechanisms (J79) |
| buyout investors (G34) | diminished response to labor insurance policies (J79) |