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Collective Dismissal Cost, Product Market Competition and Innovation

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  • Koeniger, Winfried

    (University of St. Gallen)

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.

Suggested Citation

  • Koeniger, Winfried, 2003. "Collective Dismissal Cost, Product Market Competition and Innovation," IZA Discussion Papers 888, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp888
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    References listed on IDEAS

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    More about this item

    Keywords

    Schumpeterian growth; employment protection legislation; step-by-step innovations; exit cost;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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