Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 4

38 Pages Posted: 27 Sep 2014

See all articles by Federico Cingano

Federico Cingano

Bank of Italy

Marco Leonardi

Università degli Studi di Milano; IZA Institute of Labor Economics

Julián Messina

University of Girona; Foundation for Applied Economic Research (FEDEA); IZA Institute of Labor Economics

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

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Date Written: June 27, 2014

Abstract

This paper estimates the causal impact of dismissal costs on capital deepening and productivity exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for larger firms. We show that the increase in firing costs induces an increase in the capital-labour ratio and a decline in total factor productivity in small firms relative to larger firms after the reform. Our results indicate that capital deepening is more pronounced at the low-end of the capital distribution -- where the reform hit arguably harder -- and among firms endowed with a larger amount of liquid resources. We also find that stricter EPL raises the share of high-tenure workers, which suggests a complementarity between firm-specific human capital and physical capital in moderate EPL environments.

Keywords: Capital deepening, Severance payments, Regression discontinuity design, Financial market imperfections, Credit constraints

JEL Classification: J65, G31, D24

Suggested Citation

Cingano, Federico and Leonardi, Marco and Messina, Julián and Pica, Giovanni, Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy (June 27, 2014). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 4, Available at SSRN: https://ssrn.com/abstract=2488993

Federico Cingano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marco Leonardi

Università degli Studi di Milano ( email )

14 Via Vetere
20122 Milano
Italy
+39 02 58100384 (Phone)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Julián Messina

University of Girona ( email )

Girona, 17071
Spain

Foundation for Applied Economic Research (FEDEA)

Jorge Juan 46
Madrid, 28001
Spain

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Giovanni Pica

Idep, facoltà di economia ( email )

Via Giuseppe Buffi 13
Lugano, TN Ticino 6900
Switzerland
+41586664784 (Phone)

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

Via P. Amedeo 34
Milano, Mi 20122
Italy

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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