Retention of Capable New Employees under Uncertainty: Impact of Strategic Interactions

IISE Transactions, Volume 49, 2017 - Issue 10, Pages: 927-941

32 Pages Posted: 17 Oct 2011 Last revised: 9 Jan 2019

See all articles by H. Dharma Kwon

H. Dharma Kwon

University of Illinois at Urbana-Champaign - Gies College of Business

Onesun Steve Yoo

UCL School of Management, University College London

Date Written: October 17, 2011

Abstract

We study a game involving a firm and a newly hired employee whose
capability is initially unknown to both parties. Both players observe
the performance of the employee and update their common posterior
beliefs about the employee's capability. The learning process presents
each party with an option: the firm can terminate an incapable employee,
and a capable employee can leave the firm for greater financial remuneration
elsewhere. To understand the impact of this noncooperative interaction,
we examine the Markov perfect equilibrium termination strategies
and payoffs that unfold. We find that in the region of sufficiently
high learning rates, reducing the rate of learning can increase the
equilibrium payoff for both parties. Slower learning prolongs the
employment because more performance outcomes must be observed for
assessing the employee's capability. In the region of sufficiently slow learning rates, reducing
the rate of learning can benefit the firm if the employee is deemed capable
but hurt the firm otherwise. Our result identifies a nonfinancial
way for firms to improve retention of capable new employees.

Keywords: Decision analysis, inference, Games/group decisions, stochastic, Probability, diffusion, Entrepreneurial operations, employee retention, real options game, Bayesian sequential decision

Suggested Citation

Kwon, H. Dharma and Yoo, Onesun Steve, Retention of Capable New Employees under Uncertainty: Impact of Strategic Interactions (October 17, 2011). IISE Transactions, Volume 49, 2017 - Issue 10, Pages: 927-941 , Available at SSRN: https://ssrn.com/abstract=1945268 or http://dx.doi.org/10.2139/ssrn.1945268

H. Dharma Kwon (Contact Author)

University of Illinois at Urbana-Champaign - Gies College of Business ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Onesun Steve Yoo

UCL School of Management, University College London ( email )

1 Canada Square
London, E14 5AB
United Kingdom

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