Threshold Effects and Firm Size: the Case of Firing Costs

Fabiano Schivardi and Roberto Torrini

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We study the role of employment protection legislation (EPL) in determining firm size distribution. In manycountries the provisions of EPL are more stringent for firms above certain size thresholds. We construct asimple model that shows that the smooth relation between size and growth probability is interrupted inproximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset ofall Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in termsof discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of thethreshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, wecompute the long-run effects of EPL on size distribution. We find that average firm size would increase by lessthan 1% in steady state when removing the threshold; a quantitatively modest effect.

Keywords: Firm size distribution; Employment protection; Firing costs (search for similar items in EconPapers)
JEL-codes: D21 J65 L11 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-ent and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Threshold effects and firm size: the case of firing costs (2004)
Working Paper: Threshold effects and firm size: The case of firing costs (2004)
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