The aim of the paper is to determine the impact of severance payment on the motivation of the worker to make an effort, when there is a risk for him to be dismissed once his effort was made. We highlight through a two-stage model the various factors which influence the dismissal decision by the firm and the worker’s effort, such as the initial wage, the litigation costs and the relative bargaining powers of the parties when the relationship ends or goes on. In this context, we show that the impact of the severance payment paid ex post in case of dismissal on the level of effort chosen by the worker ex ante may depend on such characteristics.
