Dismissal Regulation As a Discipline Device? Evidence from Establishment-level Industrial Actions

Filippo Belloc (University of Chieti-Pescara)

Abstract : Using data on a large sample of EU establishments, I analyze the relationship between discharge regulation and industrial actions. I introduce a simple theoretical framework allowing for both positive and negative effects of dismissal constraints on the occurence of labor disputes, and empirically answer the question as whether stricter dismissal laws make EU establishments experience more frequent and intense industrial actions (work-to-rule, strikes and occupation). I find that a change from employment at-will to a regime with very strict dismissal contraints is associated with an increase in the likelihood of observing an industrial action at the establishment-level ranging between 10.5 and 14.8 percentage points, and that this effect reduces to around 6.7 percentage ponits when only company-specific industrial actions are considered. This result is shown to be robust to possible endogeneity. Discharge constraints effects on industrial actions are then confirmed through a difference-in-differences analysis, by exploiting quasi-experimental variations in national dismissal regulations. My findings show that weaker discharge regulations moderate labor conflicts in EU establishments, by disciplining workers and restraining unions' activism.

Another Kind of Power: Labor Market Outcomes and Antitrust Legislation

Niti Bhutani (University of Delhi, India)

Abstract : Large corporate entities that dominate the business world often make it difficult for their relatively smaller and local counterparts to compete. In this scenario, if the smaller player (operating independently) shuts down business and opts to work or produce under contract for the larger firm, it is the reduced profitability of the smaller firm that will constitute the benchmark against which the contract is designed. This benchmark - that is, the reservation utility, is typically taken as exogenously given in economic theory and it is the possibility of reservation utility being endogenous that this paper formally explores. This is done by allowing the larger firm to undertake investments that not only reduce its own costs but also induce lower profitability for the smaller player. The analysis specifically highlights the labor market channel through which economic power of large corporations is manifested and also the corresponding ramifications for antitrust law.

Sourcing of Expertise and the Boundaries of the Firm: the Case of Lobbyists

Miguel Espinosa (London School of Economics)

Abstract : This paper proposes and tests a theory of vertical integration with knowledge workers. Outsourcing allows firms to solve hard problems at the cost of transmitting firm-specific knowledge. By hiring someone internally, firms save on these communication costs, with the downside of incurring costs of acquiring knowledge. Exploiting the increasing returns to the use of knowledge implies conducting easy and frequent activities in-house and harder and less frequent tasks in the external market. The economy saves communication costs when firms with large firm-specific knowledge conduct activities in-house. I confirm the empirical validity of this theory using data from a knowledge-intensive industry: US Federal Lobbying. First, using information at both the industry and bill levels, I validate the main theoretical predictions using client fixed-effects estimations. Second, I exploit the 2010 BP oil spill as an exogenous increase in the difficulty of the lobbying activities for the oil and gas extracting industry, and I show it led to a disproportionate increase in the use of external lobbyists for the affected industry. Lastly, I argue that the 2007 Open Government Act modified both the distribution of problems that firms faced and the technology to acquire knowledge. Estimating the underlying parameters of the integration decision, I explain how these two changes modified the integration patterns of the industry.

Optimal Penalties on Informal Firms

Anders Fredriksson (University of São Paulo)

Abstract : I study a much discussed and highly policy relevant question: what, if anything, should the government do about informal production? In a simple capital accumulation model of informal firm growth and potential formalization, I show analytically that optimal penalties depend on the productivity level: the least productive firms should be left alone, the more productive ones should always face positive penalties, which increase in the productivity level. This holds for two different government objectives, i.e. maximizing formal sector tax revenue, and speeding up formalization, respectively, where the latter objective results in higher average penalties. This theoretical result provides a direct policy advice in an area where some countries may have followed such a policy, without a rigorous foundation, whereas other countries have simply let all informal firms be, independent of productivity or size. The result is in line with an emerging consensus about distinct types of informal entrepreneurs.