41 Pages Posted: 27 Oct 2016 Last revised: 25 Sep 2017
Date Written: September 25, 2017
This paper examines the relationship between job insecurity and productivity. We study a fixed wage worker-firm relationship which faces match quality uncertainty. The worker chooses effort, which affects both learning and the firm's bottom line. The employer, seeing worker effort and outcomes, decides whether or not to fire the worker. As bad news accrues, the employer cannot commit to retain the worker. Rather than aligning interests, this threat creates a perverse incentive not to attract attention: the worker strategically slows learning, harming productivity. As the firm anticipates this, job insecurity can be a self-fulfilling prophecy. We fully characterize the unique equilibrium of our continuous time dynamic game. Consistent with evidence in organizational psychology, the relationship between job insecurity and productivity is U-shaped: a worker is least productive when his job is moderately secure.
Keywords: job security, dynamic agency, career concerns, low-powered incentives
JEL Classification: C73, M51, J24, D83
Suggested Citation: Suggested Citation