Employment Protection Legislation and Cooperation under Relational Contracts

In this paper, I argue how employment protection legislation (EPL) influences relationalemployment contracts. Firing costs caused by EPL are categorized into two kinds:procedural inconveniences (negotiation costs) and severance pay. I focus on theminimum value of the discount factor that sustains mutual cooperation under triggerstrategies, and show that a hike in firing costs first enhances and then dampenscooperation. Additionally, a hike in severance pay leads to moral hazard for workers.EPL processes, especially procedural inconveniences such as negotiations with unions,can enhance cooperative employment relationships as long as they are not large.Moderate, not overly strict, EPL is supportive of cooperative employment relationships