Promotions, Dismissals, and Employee Selection: Theory and Evidence
The Journal of Law, Economics, & Organization, Vol. 27, No. 1, pp. 159-179, April 2011
Posted: 21 Aug 2012
Date Written: 2011
Firms offer highly complex contracts to their employees. These contracts contain a mix of incentives, such as fixed wages, bonus payments, promotion options, and dismissals or threats of dismissal. In this article, we show that firms having a production process that is sensitive to employee quality may find it optimal to combine cost-efficient incentives such as bonuses and promotions with dismissals. Based on this result, we derive a hierarchy of incentives. Furthermore, we demonstrate the close link between the optimal contract and the employee sorting and selection and use this to analyse the information conveyed in employment matches.
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