Optimal Severance Pay in a Matching Model

This paper uses an equilibrium matching framework to study jointly the optimal private provision of severance pay and the allocational and welfare consequences of government intervention in excess of private arrangements. Firms insure risk-averse workers by means of simple explicit employment contracts. Contracts can be renegotiated ex post by mutual consent. It is shown that the privately optimal severance payment is bounded below by the fall in lifetime wealth associated with job loss. Simulations show that, despite contract incompleteness, legislated dismissal costs largely in excess of such private optimum are effectively undone by renegotiation and have only a small allocational effect. Welfare falls. Yet, for deviations from laissez faire in line with those observed for most OECD countries, the welfare loss is small.Severance pay, Contracts, Renegotiation

Investment in General Training with Consensual Layoffs

We study non-contractible firms' investment in general training in a model of frictional unemployment. Since training is vested in workers, firms' return to training is zero when a match ends. Consensual layoff provisions or large severance payments oblige firms to bargain efficiently over the joint payoff from separation. This increases employers' incentives to train as they share workers' outside return to general human capital. The result generalizes to all types of general investment that are vested in the non-investing party on separation. We also show that, independently from underinvestment in training, the laissez-faire equilibrium is always inefficient for any given level of investment.Consensual layoffs, General training, Matching

A Generalized Endogenous Grid Method for Non-concave Problems

This paper extends Carroll's (2006) endogenous grid method and its combination with value function iteration by Barillas and Fern�ndez-Villaverde (2007) to non-concave problems. The method is illustrated using a consumer problem in which consumers choose both durable and non-durable consumption. The durable choice is discrete and subject to non-convex adjustment costs. The algorithm yields substantial gains in accuracy and computational time relative to value function iteration, the standard solution choice for non-concave problems.Endogenous grid method, Non-concavity

Education and Crime over the Life Cycle

In this paper we ask whether policies targeting a reduction in crime rates through changes in education outcomes can be considered an effective and cost-viable alternative to interventions based on harsher punishment alone. In particular we study the effect of subsidizing high school completion. Most econometric studies of the impact of crime policies ignore equilibrium effects and are often reduced-form. This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. PSID, NIPA and CPS data are used to estimate the parameters of a production function with different types of human capital and to approximate a distribution of permanent heterogeneity. These estimates are used to pin down some of the modelÕs parameters. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. Furthermore, the cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. We also find that financial incentives to high school graduation have radically different implications in general and partial equilibrium (i.e. the scale of the programmes can substantially change its outcomes).

Education and Crime over the Life Cycle

In this paper we ask whether policies targeting a reduction in crime rates through changes in education outcomes can be considered an effective and cost-viable alternative to interventions based on harsher punishment alone. In particular we study the effect of subsidizing high school completion. Most econometric studies of the impact of crime policies ignore equilibrium effects and are often reduced-form. This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. PSID, NIPA and CPS data are used to estimate the parameters of a production function with different types of human capital and to approximate a distribution of permanent heterogeneity. These estimates are used to pin down some of the model's parameters. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. Furthermore, the cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. We also find that financial incentives to high school graduation have radically different implications in general and partial equilibrium (i.e. the scale of the programmes can substantially change its outcomes).Crime, Education, Subsidies

Education and Crime over the Life Cycle

This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. The cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. Financial incentives to high school graduation have radically different implications in general and partial equilibriumCrime, Education, Life Cycle

Does Divorce Law Matter?

In this paper we derive an explicit model of negotiations between spouses when utility is (partially) transferable only in case of separation. We show that inefficient separation may occur in equilibrium even under consensual divorce law. This provides theoretical support for the view that changes in social norms rather than in legislation may be responsible for increasing divorce rates.Bargaining, Divorce, Non transferability

Matching, Wage Rigidities and Efficient Severance Pay

This paper studies the effect mandated severance pay in a matching model featuring wage rigidity for ongoing, but not new, matches and Pareto efficient spot renegotiation of mandated severance pay. Severance pay matters only if real wage rigidities imply inefficient separation under employment at will. In such a case, large enough severance payments reduce job destruction and increase job creation and social efficiency, under very mild conditions. Efficient renegotiation implies that severance pay never results in privately inefficient labour hoarding and that its marginal effect is zero when its size exceeds that which induces the same allocation that would prevail in the absence of wage rigidity. These results hold under alternative micro-foundations for wage rigidity

Noncompetitive labour markets, severance payments and unemployment.

The dissertation analyses the possible welfare-enhancing role of severance payments when labour markets are non-competitive. Chapter 1 introduces the material in the thesis. Chapter 2 presents a short survey of the results of the existing literature on dismissal costs. Chapter 3 uses a strategic bargaining model to show that, once dismissal costs are correctly modelled as a payment which takes place only in case firms sever the relationship, firing costs cannot affect the separation rate in models featuring voluntary severance in the absence of restrictions. Firms will always find it profitable to induce workers to quit whenever separation is efficient. Only if some other source of inefficiency prevents firms and workers to split the rents from continuation can firing costs result in a reduced number of separations. In this case they may be efficient. Chapter 4 analyses non-contractible firms' investment in general training in the presence of frictional unemployment. It argues that consensual layoff measures and other institutions that oblige firms to share the total separation payoff result in higher training. Since general training is vested in the worker on separation, in the absence of such measures, the firm would not capture any return to training in case of separation. Chapter 5 shows that in a dynamic efficiency wage model the time-inconsistency of firing decisions implies that severance payments increase aggregate employment and are second-best Pareto optimal as they induce firms to internalise the negative externality, in the form of foregone rents, that they impose on workers on severance. Chapter 6 concludes

Buffer-stock savings and households' wealth response to income shocks

We structurally estimate a buffer-stock savings model using panel data from the Italian Survey of Household Income and Wealth that contains information not only about income and consumption but also wealth. We exploit the information about wealth and the responses of wealth and consumption to income shocks over different time horizons to infer the degree of insurance against permanent and transitory income shocks. The estimated model implies that Italian households can insure 5-10% of a permanent shock and 90-95% of a transitory shock. The degree of insurance against permanent shocks is at the low end of the range of existing estimates for the U.S