Abstract
We analyse the institutional sources of dismissal conflicts when workers’ effort is not perfectly observable. We build an efficiency wage model with firing costs to capture their effect on employment through wages. In this context, whenever there is a dismissal, a double moral hazard problem can arise. Resolution of this problem by a third party will be imperfect due to asymmetric information. In turn, disciplinary dismissals will not be costless and firing costs will have a negative effect on aggregate employment. The solution to this problem does not necessarily imply the elimination of firing costs.
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