Collective Dismissal Cost, Product Market Competition and Innovation
Journal
IZA Discussion Papers 888
Type
discussion paper
Date Issued
2003-10
Author(s)
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.
Language
English
Keywords
step-by-step innovations
employment protection legislation
exit cost
Schumpeterian growth
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Subject(s)
Eprints ID
260255