Pauline Carry from Princeton University will present "Conflict in Dismissals" (joint with Benjamin Schoefer)

Abstract: Dismissal costs are shaped by the behavior of the firm and worker. While they may coordinate to minimize costs, they might also seek costly actions ("conflict"), such as sabotage or litigation. This paper quantifies the share of dismissals distorted by conflict and identifies the drivers. Our strategy exploits the choice between two modes of separation in France: personal dismissals and "separations by mutual agreement'' (SMAs). Since SMAs waive dismissal red tape costs, enable severance pay bargaining, and preclude litigation, they should always be preferred to dismissals in an efficient bargaining model. In contrast, we find that only 12% of potential dismissals are resolved through SMAs. Surveying HR directors, we identify three underlying drivers of conflict: (i) hostility between the employer and the employee, (ii) employers using dismissals as a "discipline device'' to maintain employees' incentives, and (iii) asymmetric beliefs about subsequent labor court outcomes. Our survey additionally elicits the probability that dismissals would end in SMAs in counterfactual scenarios. We find that SMAs would replace 67% of dismissals if the three factors were absent. Focusing on two types of less adversarial dismissals, we confirm more substitutions with SMAs: when employer-employee relations are better, and when workers’ outside option improves prior to retirement.