Firm size distribution and employment protection legislation in Italy

Fabiano Schivardi and Roberto Torrini

No 504, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study the role of employment protection legislation (EPL) in explaining the relative small average size of Italian firms. We construct a simple model that shows that the smooth relation between size and growth probability is disturbed in proximity of the thresholds at which EPL applies differentially. We use a comprehensive dataset of all Italian firms between 1986 and 1998 to estimate the effects of EPL in terms of discouraging small firms from growing. We then construct a stochastic transition matrix for firm size that, together with the estimates, allows for a quantitative evaluation of the effects of EPL in the long run. Our results show that EPL does influence firm size distribution, but that its effects are quantitatively modest: average firm size would increase by less than 1% when removing the threshold effect. In terms of policy, these findings suggest that changes in EPL are not likely to have a large impact on the propensity of small firms to grow.

Keywords: Firm size distribution; firing costs; employment protection (search for similar items in EconPapers)
JEL-codes: D21 J65 L11 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-ent and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_504_04

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