Search, Self-Insurance and Job-Security Provisions
We construct a general equilibrium model to evaluate the quantitative effects of severance payments in the presence of contracting and reallocational frictions. Key elements of the model are: 1) establishment level dynamics, 3) imperfect insurance markets, and 4) variable search decisions. Contrary to previous studies that analyzed severance payments in frictionless environments, we find that severance payments reduce unemployment, produce negative insurance effects and improve welfare levels.
