Severance Payments and Firm-Specific Human Capital

16 Pages Posted: 20 Sep 2003

See all articles by Jens Suedekum

Jens Suedekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Peter Ruehmann

University of Goettingen

Abstract

What effect does employment protection through severance payments have on the behaviour of employed workers? We analyse this issue within a stochastic two-period framework where workers decide on human capital investments and find two competing effects: severance payments imply higher job security that fosters human capital formation. At the same time, a lay-off is perceived by the workers to be a weaker penalty if severance payments are provided. This incentive lowers their optimal amount of firm-specific investments. Which effect prevails on balance depends on the distribution of investment returns among firm and workers. For strong positive reactions, employment protection is also in the interests of the firm.

Suggested Citation

Südekum, Jens and Ruehmann, Peter, Severance Payments and Firm-Specific Human Capital. Available at SSRN: https://ssrn.com/abstract=416792

Jens Südekum (Contact Author)

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for the Study of Labor (IZA)

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

Peter Ruehmann

University of Goettingen

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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