Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence
AbstractFirms offer highly complex contracts to their employees. These contracts contain a mix of various incentives, such as fixed wages, bonuses, promise of promotion, and threat of firing. This paper aims at explaining the reason why this incentive- mix arises. In particular, the model focuses on why firms are combining promotions and bonuses with firing. The theoretical model proposed is a job-assignment model with heterogeneous employees. In this model the firm is concerned about job assignment, because the overall productivity of the firm depends upon the quality of the employees and their allocation to jobs. The model shows that firing has a dual role. Firing creates incentives for the employees, and it is used as a sorting device that allows the firm to improve workforce quality. Thus, quality-concerned firms might want to combine cost-efficient incentives such as promotions and bonuses with firing. To comply with the Gibbons and Waldman critique, a large set of the model’s broader predictions is stated explicitly and tested on the personnel records from a large pharmaceutical company. The model’s predictions are shown to be consistent with the data.
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Bibliographic InfoPaper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2006/2.
Length: 39 pages
Date of creation: 2006
Date of revision:
personnel economics; incentive mix; layoffs.;
Other versions of this item:
- Anders Frederiksen & Elod Takats, 2005. "Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence," Working Papers 881, Princeton University, Department of Economics, Industrial Relations Section..
- Frederiksen, Anders & Takáts, Elöd, 2006. "Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence," IZA Discussion Papers 2447, Institute for the Study of Labor (IZA).
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- M50 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - General
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