41 Pages Posted: 27 Oct 2016 Last revised: 29 Oct 2016
Date Written: October 27, 2016
This paper examines the effect of job insecurity on productivity. We study a fixed wage relationship between a firm and a worker in which neither knows how well-suited the worker is to the job. The worker decides the level of effort, a choice that affects both learning and the firm's bottom line. The employer, seeing the worker's effort choice and outcome, decides whether or not to continue employing the worker. The employer cannot commit to retain the worker when she becomes pessimistic enough about the match quality. We show that, 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 explicitly characterize the unique Markov perfect equilibrium in our continuous time dynamic game. Consistent with empirical evidence in organizational psychology, equilibrium exhibits a U-shaped relationship between job insecurity and productivity: a worker is least productive when his job is moderately secure.
Keywords: job security, dynamic agency, career concerns, low-powered incentives
JEL Classification: M51, J24, C73, D83
Suggested Citation: Suggested Citation
Kuvalekar, Aditya V and Lipnowski, Elliot, Job Insecurity (October 27, 2016). Available at SSRN: https://ssrn.com/abstract=2860092