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Lalé, Étienne
Year of Publication: 
Series/Report no.: 
Document de travail No. 2018-30
We analyze the effects of government-mandated severance payments in a rich life-cycle model with search-matching frictions in the labor market, risk-averse agents and imperfect insurance against idiosyncratic shocks. Our model emphasizes a tension between workerfirm wage bargains and consumption smoothing: entry wages respond to expected future severance payments by tilting downwards, which runs counter to having a smooth consumption path. Quantitatively, we find that these wage-shifting effects are sizable enough for severance payments to produce large welfare losses. Our assessment contrasts sharply with previous studies that restricted the extent of worker-firm bargaining to analyze the welfare implications of severance payments.
Document Type: 
Working Paper

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