When Do Firing Costs Matter?

Queen Mary & Westfield College Working Paper No. 400

32 Pages Posted: 1 May 2000

See all articles by Giulio Fella

Giulio Fella

Queen Mary, University of London

Date Written: February 1999


This paper uses a strategic bargaining framework to reassess the effect of dismissal costs in models of voluntary separation. It shows that firing, as opposed to inducing a quit, is always an off-equilibrium strategy for firms in this class of models. Thus, dismissal costs can affect payoffs only if some exogenous event may force the firm to fire the worker despite it being suboptimal, or if the firm's assets are only partly specific to the relationship. In this latter case, dismissal costs increase the specificity of the firm's capital and depress ex post expected profits. In any case, firing restrictions do not affect separation decisions, as firms always find it profitable to induce workers to quit whenever separation is efficient. Involuntary separation is an essential feature of a world in which firing costs result in a lower probability of separation. In such a world, they may be welfare improving, as the separation rate is inefficiently high in the absence of firing restrictions.

JEL Classification: J32, J63, J65

Suggested Citation

Fella, Giulio, When Do Firing Costs Matter? (February 1999). Queen Mary & Westfield College Working Paper No. 400. Available at SSRN: https://ssrn.com/abstract=185112 or http://dx.doi.org/10.2139/ssrn.185112

Giulio Fella (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London E1 4NS, London E1 4NS
United Kingdom

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