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Managerial Turnover in a Changing World

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  • Daniel F. Garrett
  • Alessandro Pavan

Abstract

We develop a dynamic theory of managerial turnover in a world in which the quality of the match between a firm and its managers changes stochastically over time. Shocks to managerial productivity are anticipated at the time of contracting but privately observed by the managers. Our key positive result shows that the firm's optimal retention decisions become more permissive with time. Our key normative result shows that, compared to what is efficient, the firm's contract induces either excessive retention at all tenure levels or excessive firing at the early stages of the relationship, followed by excessive retention after sufficiently long tenure.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/668836
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File URL: http://www.jstor.org/stable/full/10.1086/668836
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 120 (2012)
Issue (Month): 5 ()
Pages: 879 - 925

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Handle: RePEc:ucp:jpolec:doi:10.1086/668836

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References

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  1. Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: a Mechanism Design Approach," Discussion Papers 1491, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Edmans, Alex & Gabaix, Xavier, 2009. "Tractability in Incentive Contracting," CEPR Discussion Papers 7578, C.E.P.R. Discussion Papers.
  3. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
  4. Yuliy Sannikov & Xavier Gabaix & Tomasz Sadzik & Alex Edmans, 2010. "Dynamic Incentive Accounts," 2010 Meeting Papers 1207, Society for Economic Dynamics.
  5. Alessandro Pavan & Ilya Segal & Juuso Toikka, 2009. "Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure," Discussion Papers 1501, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
  7. Caillaud, Bernard & Guesnerie, Roger & Rey, Patrick, 1989. "Noisy observation in adverse selection models," CEPREMAP Working Papers (Couverture Orange) 8921, CEPREMAP.
  8. Arijit Sen, 1996. "Termination Clauses in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 473-496, December.
  9. David McAdams, 2011. "Performance and Turnover in a Stochastic Partnership," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 107-42, November.
  10. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2681-2724, December.
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Citations

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Cited by:
  1. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  2. George-Marios Angeletos & Alessandro Pavan, 2007. "Socially Optimal Coordination: Characterization and Policy Implications," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 585-593, 04-05.
  3. Marco LiCalz & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition on Uniform-Price Auctions," Discussion Papers 1495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Ronald W. Anderson & M. Cecilia Bustamante & St├ęphane Guibaud, 2012. "Agency, Firm Growth, and Managerial Turnover," FMG Discussion Papers dp711, Financial Markets Group.
  5. Ronald W. Anderson & Maria Cecilia Bustamante & St├ęphane Guibaud, 2012. "Agency, firm growth, and managerial turnover," LSE Research Online Documents on Economics 43144, London School of Economics and Political Science, LSE Library.
  6. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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