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Threshold effects and firm size: the case of firing costs

By Fabiano Schivardi and Roberto Torrini

Abstract

We study the role of employment protection legislation (EPL) in determining firm size distribution. In many countries the provisions of EPL are more stringent for firms above certain size thresholds. We construct a simple model that shows that the smooth relation between size and growth probability is interrupted in proximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset of all Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in terms of discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of the threshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, we compute the long-run effects of EPL on size distribution. We find that average firm size would increase by less than 1% in steady state when removing the threshold; a quantitatively modest effect

Topics: HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2004
OAI identifier: oai:eprints.lse.ac.uk:19956
Provided by: LSE Research Online

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