Privately optimal severance pay

Giulio Fella and Christopher Tyson

The B.E. Journal of Macroeconomics, 2013, vol. 13, issue 1, 415-453

Abstract: This paper constructs an equilibrium matching model with risk-averse workers and incomplete contracts to study both the optimal private provision of severance pay and the consequences of government mandates in excess of the private optimum. The privately-optimal severance payment is bounded below by the fall in lifetime wealth resulting from job loss. Despite market incompleteness, mandated minimum payments significantly exceeding the private optimum are effectively undone by adjustment of the contractual wage, and have only small allocational and welfare effects.

Keywords: employment protection; incomplete contracts; job creation; unemployment (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (18)

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DOI: 10.1515/bejm-2012-0148

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