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We investigate how Internal Labor Markets (ILMs) allow complex organizations to accommodate positive and negative shocks calling for costly labor adjustments. Adverse shocks affecting one unit in the organization are shown to increase workers' mobility to other units rather than external firms, with stricter employment protection in the adversely hit unit causing an additional increase in internal mobility. The ILM response to adverse shocks is also stronger when the receiving units in the organization are more productive and have a better financing capacity. We also find that affiliated units faced with positive shocks to their growth opportunities rely on the ILM for new hires, especially managers in the top layers of the organization and other high-skilled workers, thus overcoming human capital bottlenecks that may curb growth. ILMs therefore emerge as a co-insurance mechanism within organizations, allowing them to bypass both firing and hiring frictions, and providing job stability to employees as a by-product.

This paper estimates the effect of employment protection legislation (EPL) on workers' individual wages in a quasi-experimental setting, exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees and left firing costs unchanged for bigger firms. Accounting for the endogeneity of the treatment status, we find that the slight average wage reduction (between –0.4 and –0.1 percent) that follows the increase in EPL hides highly heterogeneous effects. Workers who change firm during the reform period suffer a drop in the entry wage, while incumbent workers are left unaffected. Results also indicate that the negative wage effect of the EPL reform is stronger on young blue collars and on workers at the low-end of the wage distribution. Finally, workers in low-employment regions suffer higher wage reductions after the reform. This pattern suggests that the ability of the employers to shift EPL costs onto wages depends on workers' and firms' relative bargaining power.

Using data from the Bank of Italy’s Household Survey we find that a wage curve exists in Italy after the 1992-93 wage reforms for annual and monthly wages but not for hourly wages. Consistently, after the reforms we find a negative elasticity of annual hours and months worked with respect to the unemployment rate.

This paper provides evidence that incumbent and entrant firms' access to business group deep pockets affects entry patterns in product markets. Relying on a unique French data set on business groups, this paper shows that entry in manufacturing industries is negatively related to the cash hoarded by incumbent-affliated groups, and positively related to entrant groups' cash. In line with theoretical predictions, we find that the impact on entry of group cash holdings is more important in environments where financial constraints are pronounced and in more financially dependent sectors. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the 3 to 5 year post-entry window. Overall, our findings suggest that internal capital markets operate within corporate groups and affect the product market behavior of affliated firms by mitigating financial constraints.

We provide evidence suggesting that incumbents’ access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, our paper presents three major findings. First, the amount of cash holdings owned by incumbent-affiliated groups is negatively related to entry in a market. Second, the impact on entry of group deep pockets is more important in markets where access to external funding is likely to be more difficult. Third, the “entry deterring effect” of group deep pockets is more pronounced when groups have more active internal capital markets. Our findings suggest that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect.

This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD International Direct Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.