Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/301996.3 
Year of Publication: 
2026
Series/Report no.: 
IWH Discussion Papers No. 17/2023
Version Description: 
This version: April 29, 2026
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
Abstract: 
We study the firm-level and aggregate effects of government-imposed employment targets. We develop a dynamic general equilibrium model with heterogeneous firms and endogenous productivity growth in which penalties for below-target hiring generate a polarization mechanism: low-productivity firms exit, while others expand employment beyond efficient levels, and firms invest in productivity to avoid future penalties. We test and confirm the model’s firm level predictions using unique contractual data on more than 18,000 employment commitments from the East German privatization, exploiting quasi-random variation in the assignment of privatizers to firms. Quantitatively, employment targets reduce unemployment in the short run, but these gains reverse over time as distorted labor allocations and weakened investment incentives slow aggregate productivity growth and reduce welfare. We also evaluate how alternative designs for employment-protection (e.g., the choice between mandates and subsidies, the structure of targets) impact misallocation and the resulting short- and long-run outcomes.
Subjects: 
industrial policy
privatizations
productivity
size-dependent regulations
JEL: 
D22
D24
J08
L25
Persistent Identifier of the first edition: 
Document Type: 
Working Paper





Version History
Version Item Summary
3 10419/301996.3 This version: April 29, 2026
2 10419/301996.2 This version: 03.03.2025
1 10419/301996 This version: 19.08.2024

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