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Firing the wrong workers: financing constraints and labor misallocation

Caggese, Andrea, Cuñat, Vicente and Metzger, Daniel (2017) Firing the wrong workers: financing constraints and labor misallocation. Journal of Financial Economics. ISSN 0304-405X (In Press)

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Firms consider wages, current and expected productivity as well as firing and hiring costs when firing a worker. Financing constraints distort this intertemporal trade-off, leading firms to sub-optimally fire short-tenured workers with high future expected productivity. We provide empirical evidence of this distortion using matched employer-employee data from the Swedish population between 2000 and 2010. We propose a new empirical strategy that uses credit ratings to identify financing constraints and uses exchange rates and trade data to identify demand shocks. Our empirical results identify an important new misallocation effect of financial frictions that operates within firms across different types of workers.

Item Type: Article
Official URL:
Additional Information: © 2017 The Authors
Divisions: Finance
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 20 Nov 2017 09:39
Last Modified: 07 Mar 2019 11:06

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