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Designing Severance Payments and Decision Rights for Efficient Plant Closure under Profit-Sharing

Chapter
Part of the Studies in Economic Design book series (DESI)

Abstract

Our concern is the assignment of the right to shut down a firm in which there is profit-sharing. The scenario features an uncertain market demand and factor specialization in a dynamic setting. If the firm closes, factors have to bear a cost to be re-employed elsewhere because of their specialisation. The paper belongs to the literature on the endogenous ownership structure of the firm. We deal with various lay-off compensations when factors face different mobility costs. We are able to list circumstances in which granting employees the decision to close can increase the aggregate pay-off accruing to employees and shareholders, with respect to the usual practice of management on behalf of shareholders. In this latter case a deadweight loss may appear. Loss of control over exit is costly for shareholders. We then design a compensation scheme for transfer and/or sharing of the closing decision, leading to a Nash perfect equilibrium. The result is a non-stop, non-decreasing flow of payments from employees to shareholders, subject to a participation constraint.

Keywords

specificity shut down option assignment 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2003

Authors and Affiliations

  1. 1.Dipartimento di Scienze Economiche and Fondazione ENI Enrico MatteiUniversity of PadovaItaly
  2. 2.Dipartimento di Scienze EconomicheUniversity of BolognaItaly

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