Dismissal Disputes and Endogenous Sorting

Dismissal disputes lead often to long and costly contract termination procedures and occur mostly in recessions. This paper investigates how disputes may affect the job-matching process. First, we present a simple accounting framework that corresponds with general dismissal legislation but is sufficiently exible to accommodate country-specific legislation. Detailed information from a sample of 2,191 disputes that occurred in the Netherlands between 2006 and 2009 is used to adjust the framework to its institutional specificity. The resulting equilibrium matching model rationalizes endogenous sorting between lengthy and costly firing procedures. The model also rationalizes the longevity of the dual Dutch model and its political resilience.