Conflict in Dismissals

Dismissal costs are shaped by firm and worker behavior. While they might coordinate to minimize costs, adversarial separations may also entail cost-seeking actions ("conflict").

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 and enable severance pay bargaining, 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. We then identify the sources of conflict that lead to the choice of the costlier separation mode in 88% of dismissals.

Our survey of HR directors reveals three crucial drivers, which account for 63% of the failures to convert dismissals into SMAs: (i) hostility between the employer and the employee, (ii) employers using dismissals as a discipline device, and (iii) asymmetric beliefs about labor court outcomes following a dismissal.

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