The Magic of Layoff Taxes Requires Equilibrium Stability

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Frédéric Gavrel, « The Magic of Layoff Taxes Requires Equilibrium Stability », HAL-SHS : économie et finance, ID : 10.1007/s10797-017-9459-y


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In the same vein as Blanchard and Tirole (2008) First Pass, this note shows that, under the condition for equilibrium stability, the partial implementation of layoff taxes invariably increases firms' profits as well as workers' utilities by lowering payroll taxes. It also proves that requiring stability does not raise any equilibrium existence issue per se: since the budget constraint of unemployment compensation induces multiple equilibria, the condition for stability simply permits the selection of one of these equilibria. These insights could favor the introduction of firing taxes, which in practice would probably be a gradual process

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