Optimal Severance Pay in a Matching Model

Giulio Fella

Research output: Working paperAcademic

Abstract

This paper uses an equilibrium matching framework to study jointly the optimal private provision of severance pay and the allocational and welfare consequences of government intervention in excess of private arrangements. Firms insure risk- averse workers by means of simple explicit employment contracts. Contracts can be renegotiated ex post by mutual consent. It is shown that the lower bound on the privately optimal severance payment equals the fall in lifetime wealth associated with job loss. Simulations show that, despite contract incompleteness, legislated dismissal costs largely in excess of such private optimum are effectively undone by renegotiation and have only a small allocational effect. Welfare falls. Yet, for deviations from laissez faire in line with those observed for most OECD countries, the welfare loss is small.
Original languageEnglish
PublisherUU USE Tjalling C. Koopmans Research Institute
Number of pages49
Publication statusPublished - Mar 2007
Externally publishedYes

Publication series

NameU.S.E. Discussion paper series
No.02
Volume07
ISSN (Electronic)2666-8238

Fingerprint

Dive into the research topics of 'Optimal Severance Pay in a Matching Model'. Together they form a unique fingerprint.

Cite this