An Analysis of the Effects of the Severance Pay Reform on Credit to Italian SMEs

Riccardo Calcagno (), Roman Kraeussl and Chiara Monticone
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Riccardo Calcagno: Free University and Tinbergen Institute, Amsterdam; CeRP, Turin
Roman Kraeussl: Free University of Amsterdam and Center for Financial Studies, Frankfurt am Main
Authors registered in the RePEc Author Service: Roman Kräussl

No 59, CeRP Working Papers from Center for Research on Pensions and Welfare Policies, Turin (Italy)

Abstract: In this paper we study the effects of the reform of the system of severance indemnities (TFR) currently in use for Italian employees on the cost and the access to credit for Italian small and medium-size enterprises (SMEs). The most direct consequence of the reform will be to reduce the amount of liquid assets available to Italian firms. We argue that this reform, which will produce its first effects in July 2007, will reduce the aggregate investment by SMEs in a more than proportional way in a long run, since it will restrict the access to credit for some of them (Holmstrom and Tirole, 1997). However, we also predict that the reform will not increase the cost of intermediated finance in the long run, coeteris paribus. Nonetheless, in the short-term, if the level of investment by firms can be considered as exogenous, the reform is likely to increase the cost of bank credit for SMEs. In order to perform quantitative estimates of the effect of the reform, we also estimate the future outflows of TFR from the balance sheet of the firms from data covering the whole population of Italian firms.

Keywords: severance indemnities; moral hazard; credit constraints (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-04
New Economics Papers: this item is included in nep-ban, nep-eec and nep-reg
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Citations: View citations in EconPapers (2)

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