Abstract: This article develops a theory that explains the political origins of size-contingent Employment Protection Legislation (EPL), which imposes stricter rules on firms whose number of employees exceeds a certain threshold. In the model, citizens are heterogeneous in wealth and make an occupational choice that determines their voting preferences for EPL. The equilibrium policy only protects workers in larger firms, regardless of the government’s primary concern for either workers or entrepreneurs. Firms strategically adjust their labor in response to a size-contingent policy, resulting in welfare distortions. Welfare distortions can be eliminated by properly regulating independent negotiations between workers and entrepreneurs.
Diego Huerta
PhD Student in Economics
I’m a fourth-year economics Ph.D. candidate at Northwestern University. My research is at the intersection of macroeconomics and political economy. In my work, I employ heterogeneous agent models to understand the joint determination of inequality, policies, and economic outcomes.