Inside severance pay

Tito Boeri, Pietro Garibaldi and Espen Moen ()

Journal of Public Economics, 2017, vol. 145, issue C, 211-225

Abstract: All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. The paper shows that mandatory severance is optimal in presence of wage deferrals induced by workers' moral hazard. We also establish a link between optimal severance and efficiency of the legal system and characterize the effects of shifting the burden of proof from the employer to the worker. Quantitatively, the welfare effects of suboptimal severance payments vary in general equilibrium between 1 and 3 %. The model accounts also for two neglected features of the legislation. The first is the discretion of judges in declaring the nature, economic vs. disciplinary, of the layoff. The second feature regards the relationship between severance and tenure. Our theory gives necessary conditions under which optimal severance is increasing with tenure, as generally observed.

Keywords: Severance; Unfair dismissal; Graded security; Legal systems (search for similar items in EconPapers)
JEL-codes: J33 J63 J65 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0047272716301608
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Inside Severance Pay (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:145:y:2017:i:c:p:211-225

DOI: 10.1016/j.jpubeco.2016.11.003

Access Statistics for this article

Journal of Public Economics is currently edited by R. Boadway and J. Poterba

More articles in Journal of Public Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().