49 Pages Posted: 27 Oct 2016 Last revised: 6 Feb 2018
Date Written: February 6, 2018
We examine the relationship between job security and productivity, in a fixed wage worker-firm relationship facing match quality uncertainty. The worker chooses effort, affecting both learning and current productivity. The firm, seeing worker effort 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 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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