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    The welfare implications of firing costs

    Booth, A.L. and Zoega, Gylfi (2003) The welfare implications of firing costs. European Journal of Political Economy 19 (4), pp. 759-775. ISSN 0176-2680.

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    This is a paper on the theory of institutions. It provides a rationale for the presence of firing costs in OECD countries based on a market failure that takes the form of an externality. Workers have firm-specific and industry-specific skills, and in each period there is a nonzero probability that a worker quits. The quitting probability makes the private discount rate (used by firms in making decisions about firing workers) higher than the social discount rate. This generates a “quitting externality”, where firms lay off too many workers in a recession. Firms are too quick to dispose of their human capital in a cyclical downturn because it is of less value to them than it is to society. State-mandated redundancy payments become a second-best remedy to overcome the market failure.


    Item Type: Article
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Sarah Hall
    Date Deposited: 08 Dec 2020 14:18
    Last Modified: 08 Dec 2020 14:18


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