Firm-Fit Transparency and Incentives

Abstract

Firms vary in whether they are transparent with employees about their “fit” within the firm. We build an analytical model to provide an explanation for these variations. The trade-off in our setting is that transparency motivates the “good-fit” employee and demotivates the “bad-fit” employee. Our main result shows that a firm commits to a policy of transparency (secrecy) only when employee success is less (more) informative of effort for a good-fit employee. We also establish that transparency is generally suboptimal when it can induce a good-fit employee to become complacent.

Keywords: Employee-firm fit, transparency, contracting, complacency, output-effort informativeness

JEL Classification: D82, D86, M12, M52