Collective Dismissal Cost, Product Market Competition and Innovation

Winfried Koeniger

No 888, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Collective dismissal costs are an important part of employment protection legislation (EPL) and make firms' exit more costly. We show in a model with step-by-step innovations that dismissal costs spur innovation if product markets are not too competitive: technologically more advanced firms endogenously exit with smaller probability so that there is a dynamic incentive to innovate. But dismissal costs decrease the absolute value of firms and induce exit. These opposite effects and their dependence on the policy mix of EPL and product market regulation explain why empirical studies have difficulties to find a negative effect of EPL on innovation.

Keywords: Schumpeterian growth; employment protection legislation; step-by-step innovations; exit cost (search for similar items in EconPapers)
JEL-codes: J65 L16 O31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2003-10
New Economics Papers: this item is included in nep-dev, nep-ent, nep-ind and nep-ino
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Published - revised version published in: Economics Letters, 2005, 88 (1), 79-84

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