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DO FIRING COSTS AFFECT THE INCIDENCE OF FIRM BANKRUPTCY?

Published online by Cambridge University Press:  23 August 2006

ROBERTO M. SAMANIEGO
ROBERTO M. SAMANIEGO
Affiliation:
George Washington University
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Abstract

An overlooked topic is the treatment of worker claims when firms are shutting down. In fact, when firms close, worker claims such as severance pay often go unfulfilled. To evaluate the quantitative importance of this observation, this paper develops a general equilibrium model with close attention to the exit margin, and examines how macroeconomic outcomes vary with the treatment of firing costs on exit. In the model, the impact of firing costs on employment weakens by a third when closing plants do not have to pay them, even though closure accounts for considerably less than one-third of total job destruction. Thus, the distribution of firm characteristics is a new channel for labor market rigidities to affect aggregates. The model also accounts for cross-country differences in the relationship between the structure of job flows and firm turnover.

Keywords

Firing CostsBankruptcyEntry and Exit
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 10 , Issue 4 , September 2006 , pp. 467 - 501
Copyright
© 2006 Cambridge University Press

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