54 Pages Posted: 27 Oct 2016 Last revised: 25 Nov 2018
Date Written: November 22, 2018
We examine the relationship between job security and productivity, in a fixed wage worker-firm relationship facing match quality uncertainty. The worker’s action affects both learning and current productivity. The firm, seeing worker behavior and outcomes, makes a firing decision. As bad news accrues, the firm cannot commit to retain the worker. This creates perverse incentives: the worker strategically slows learning, harming productivity. We fully characterize the unique equilibrium in our continuous-time game. Consistent with some 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
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