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Labor-market Frictions, Incomplete Insurance and Severance Payments

Etienne Lalé ()

CIRANO Working Papers from CIRANO

Abstract: We analyze the effects of government-mandated severance payments in a rich life-cycle model with search-matching frictions in the labor market, risk-averse agents and imperfect insurance against idiosyncratic shocks. Our model emphasizes a tension between worker-firm bargains and consumption smoothing: entry wages are tilted downwards as a response to future severance payments, which runs counter to having a smooth consumption path. Consequently, we find that severance payments produce mostly negative welfare effects. We use the model to characterize the determinants of these welfare losses. We show that even when optimized jointly with unemployment insurance benefits, large government-mandated severance payments should be avoided. This Working Paper was published in Review of Economic Dynamics. Read the article on Review of Economic Dynamic Ce cahier scientifique CIRANO est maintenant publié dans la Review of Economic Dynamics. Consulter l'article sur le site de la Review of Economic Dynamic

Keywords: Severance Payments; Labor-market Frictions; Precautionary Savings; Welfare (search for similar items in EconPapers)
JEL-codes: E21 I38 J63 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Date: 2018-04-26
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https://cirano.qc.ca/files/publications/2018s-14.pdf

Related works:
Journal Article: Labor-market Frictions, Incomplete Insurance and Severance Payments (2019) Downloads
Working Paper: Labor-market Frictions, Incomplete Insurance and Severance Payments (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2018s-14

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