The Incentive for Separation: Job Training and Put Options

Abstract

This study examines how a job training, combined with put options, may induce workers with a poor fit with a firm to leave, which would enhance the firm's screening efficiency and value. In many cases, neither workers nor the employing firm have information about their fit, even though the fit may be the most important determinant of employee performance. Job training offers an opportunity for the worker to learn about the fit. Although the fit remains the worker's private information, the firm can design more efficient contracts and selectively motivate a trained worker with a signal of a high fit. Moreover, put options can improve screening efficiency by providing an incentive for the worker to leave voluntarily if he or she observes a low fit signal. However, put options contracts may be too aggressive and encourage even workers with a high fit to leave in response to an imperfect signal from job training. Considering the overall trade-off, this research shows that a put option contract can increase a firm's value, as long as the precision of the job training signal is not too low.

Keywords: Job Training, Adverse Selection, Incentives, Put Options

JEL Classification: D82, M41, M53