Moretto M., Rossini G. (2003)

Designing Severance Payments and Decision Rights for Efficient Plant Closure under Profit-Sharing. In Advances in Economic Design (pp. 363-386). 

 

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.