Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy

29 Pages Posted: 29 Jan 2014

See all articles by Federico Cingano

Federico Cingano

Bank of Italy

Marco Leonardi

Università degli Studi di Milano; IZA Institute of Labor Economics

Julian Messina

World Bank

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

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Date Written: October 2013

Abstract

Employment protection may affect both productivity and capital investment because higher adjustments costs hamper allocative efficiency and may therefore affect both the optimal capital labor input mix and total factor productivity. To estimate the impact of dismissal costs on capital deepening and productivity we exploit a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. We provide evidence that the increase in firing costs induced capital deepening and a decline in total factor productivity in small firms relative to larger firms after the reform. We also find that capital deepening is more pronounced at the low-end of the capital distribution - where the reform arguably hit harder - and among firms endowed with a larger amount of liquid resources, that have more room to react thanks to an easier access to the credit market. Our results also indicate that the EPL reform reduced the probability to access the credit market, possibly because stricter EPL reduces both the value of the firm and the amount of internal resources that the firm can pledge as collateral against lenders.

Keywords: Capital Deepening, Severance Payments, Regression Discontinuity Design, Financial Market Imperfections, Credit Constraints

JEL Classification: J65, G31, D24

Suggested Citation

Cingano, Federico and Leonardi, Marco and Messina, Julián and Pica, Giovanni, Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy (October 2013). Centro Studi Luca d'Agliano Development Studies Working Paper No. 354, Available at SSRN: https://ssrn.com/abstract=2386056 or http://dx.doi.org/10.2139/ssrn.2386056

Federico Cingano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marco Leonardi

Università degli Studi di Milano ( email )

14 Via Vetere
20122 Milano
Italy
+39 02 58100384 (Phone)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Julián Messina

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Giovanni Pica (Contact Author)

Idep, facoltà di economia ( email )

Via Giuseppe Buffi 13
Lugano, TN Ticino 6900
Switzerland
+41586664784 (Phone)

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

Via P. Amedeo 34
Milano, Mi 20122
Italy

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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