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Promotions, Dismissals, and Employee Selection: Theory and Evidence

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  • Anders Frederiksen
  • Előd Takáts

Abstract

Firms offer highly complex contracts to their employees. These contracts contain a mix of incentives, such as fixed wages, bonus payments, promotion options, and dismissals or threats of dismissal. In this article, we show that firms having a production process that is sensitive to employee quality may find it optimal to combine cost-efficient incentives such as bonuses and promotions with dismissals. Based on this result, we derive a hierarchy of incentives. Furthermore, we demonstrate the close link between the optimal contract and the employee sorting and selection and use this to analyse the information conveyed in employment matches. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Anders Frederiksen & Előd Takáts, 2011. "Promotions, Dismissals, and Employee Selection: Theory and Evidence," Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(1), pages 159-179.
  • Handle: RePEc:oup:jleorg:v:27:y::i:1:p:159-179
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    File URL: http://hdl.handle.net/10.1093/jleo/ewp017
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    Cited by:

    1. Kambayashi, Ryo & Ueno, Yuko, 2015. "Firms' Incentive Provisions: Tournament Structure and Worker Flow," RCESR Discussion Paper Series DP15-11, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.
    2. Bond, Timothy N., 2011. "Internal Labor Markets in Equilibrium," MPRA Paper 64496, University Library of Munich, Germany, revised 20 May 2015.
    3. Frederiksen, Anders & Kahn, Lisa B. & Lange, Fabian, 2017. "Supervisors and Performance Management Systems," IZA Discussion Papers 10725, Institute for the Study of Labor (IZA).
    4. Frederiksen, Anders & Lange, Fabian & Kriechel, Ben, 2017. "Subjective performance evaluations and employee careers," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 408-429.

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