Optimal Severance Payment: Theory and Practice

Byeongju Jeong

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: I present a model in which the employment contract includes severance payment as an instrument for achieving optimal separation between the firm and the worker. I show that the privately optimal severance payment from the model can replicate the level and the variation in actual severance payments (and notice periods) across OECD countries. I conduct a policy experiment in which the existing unemployment benefits are financed by a separation tax. Under this policy, the actual severance payments need to change only marginally in order to achieve socially optimal separation.

Date: 2005-04
New Economics Papers: this item is included in nep-acc
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