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

See all articles by Anders Frederiksen

Anders Frederiksen

IZA Institute of Labor Economics

Elod Takats

affiliation not provided to SSRN

Date Written: 2011

Abstract

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.

Suggested Citation

Frederiksen, Anders and Takats, Elod, Promotions, Dismissals, and Employee Selection: Theory and Evidence (2011). The Journal of Law, Economics, & Organization, Vol. 27, No. 1, pp. 159-179, April 2011. Available at SSRN: https://ssrn.com/abstract=2132479

Anders Frederiksen (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Elod Takats

affiliation not provided to SSRN ( email )

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