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Privately optimal severance pay

Author

Listed:
  • Fella Giulio

    (School of Economics and Finance, Queen Mary University of London, Mile End Road, London E1 4NS, UK)

  • Tyson Christopher J.

    (School of Economics and Finance, Queen Mary University of London, Mile End Road, London E1 4NS, UK)

Abstract

This paper constructs an equilibrium matching model with risk-averse workers and incomplete contracts to study both the optimal private provision of severance pay and the consequences of government mandates in excess of the private optimum. The privately-optimal severance payment is bounded below by the fall in lifetime wealth resulting from job loss. Despite market incompleteness, mandated minimum payments significantly exceeding the private optimum are effectively undone by adjustment of the contractual wage, and have only small allocational and welfare effects.

Suggested Citation

  • Fella Giulio & Tyson Christopher J., 2013. "Privately optimal severance pay," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 415-453, October.
    • Handle: RePEc:bpj:bejmac:v:13:y:2013:i:1:p:39:n:24
    DOI: 10.1515/bejm-2012-0148
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.
    2. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    3. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    4. Stéphane Auray & Samuel Danthine & Markus Poschke, 2020. "Understanding the Determination of Severance Pay: Mandates, Bargaining, and Unions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(3), pages 1073-1111, July.
    5. Créchet, Jonathan, 2024. "A model of risk sharing in a dual labor market," Journal of Monetary Economics, Elsevier, vol. 147(C).
    6. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    7. Samuel Danthine & Markus Poschke & Stephane Auray, 2016. "Understanding Severance Pay Determination: Mandates, Bargaining, and Unions," 2016 Meeting Papers 967, Society for Economic Dynamics.
    8. Sahin Avcioglu & Bilgehan Karabay, 2020. "Labor market regulation under self‐enforcing contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1965-2018, December.
    9. Auray, Stéphane & Danthine, Samuel & Poschke, Markus, 2014. "Mandated versus Negotiated Severance Pay," IZA Discussion Papers 8422, Institute of Labor Economics (IZA).
    10. Kerndler, Martin, 2016. "Contracting frictions and inefficient layoffs of older workers," VfS Annual Conference 2016 (Augsburg): Demographic Change 145711, Verein für Socialpolitik / German Economic Association.

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