“…4 There has been research done on illegal means of avoiding labor market institutions: however, it has focused on different aspects than we do in the current paper. For example, several contributions analyze default of firms with respect to severance payments (see, e.g., GaldonSanchez and Güell, 2003, Martin et al, 2004, Azetsu and Kumagai, 2006, Stähler, 2008, and Besancenot and Vranceanu, 2009). Starting with Ashenfelter and Smith (1979), a rich literature on noncompliance with minimum wage laws and the consequences for employment levels has developed (see, e.g., the very recent contributions by Danziger (2009Danziger ( , 2010 and Basu et al (2010)).…”