Employers' Unilateral Settlement of Dismissal Disputes

We analyze legally binding unilateral settlement options for employers in dismissal disputes using a model of employment adjustment followed by bargaining and litigation. Contrary to common concerns, we show that unilateral settlement reduces inefficient adjustments and increases the surplus of moderately productive workers when adjustments do not significantly hurt productivity. When unilateral settlement is available, employers are tempted to settle unilaterally to save litigation costs at the expense of output that could be restored by reinstatement. This dynamic inconsistency weakens their bargaining position. Well-designed unilateral settlement institutions can thus promote stable employment, efficiency, and equity beyond mere litigation cost savings.