Courts are an important element in the institutional framework of labor markets, often determining the actual degree of employment protection. German labor courts provide a vivid example in this regard. However, we know relatively little about actual court behavior. A unique data set on German...

Wage determination under asymmetric information generates inefficiencies due to excess turnover. Severance pay and layoff taxes can improve efficiency. We show that inefficient separations can even be fully removed with fixed separation taxes in the case where the relevant private information is...