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Bankruptcy and the difficulty of firing

Nicolae Stef

International Review of Law and Economics, 2018, vol. 54, issue C, 85-94

Abstract: Firms may use layoffs as an ex ante mechanism to avoid filing for bankruptcy. However, the national labor law may impose some restrictions that delay or hamper the firing decision of the employer. This study proposes a different legal pathway for policymakers whose goal is to reduce the use of bankruptcy without acting on the design of the bankruptcy law. Using a sample of 33 countries from 2007 to 2015, we show that the total amount of firing restrictions leads to more bankruptcies. The employer’s legal obligation to notify a third party prior the dismissal of one employee tends to increase the number of bankruptcies. It is very likely that the employer’s rescue strategy endures an intense ex post monitoring of the employment contracts and/or a strong legal opposition to the layoff decision from such third party. In addition, labor codes that apply priority rules in case of reemployment can increase the use of bankruptcy.

Keywords: Bankruptcy; Layoff; Labor (search for similar items in EconPapers)
JEL-codes: G33 G38 J63 K31 (search for similar items in EconPapers)
Date: 2018
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International Review of Law and Economics is currently edited by C. Ott, A. W. Katz and H-B. Schäfer

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