IDEAS home Printed from https://ideas.repec.org/a/ucp/jlabec/v23y2005i4p797-838.html
   My bibliography  Save this article

Threat of Dismissal: Incentive or Sorting?

Author

Listed:
  • Illoong Kwon

    (University of Michigan)

Abstract

Many people are fired from their jobs for poor performance. However, it is difficult to distinguish whether they are fired because they are not well suited for their job (sorting explanation) or because the firms are trying to provide incentives for effort (incentive explanation). This article develops a dynamic incentive model of dismissal and proposes a methodology to distinguish between these two explanations. The methodology is based on learning-by-doing and changes in the slope of dismissal probability with respect to tenure. Using personnel data from a large U.S. company, this study finds significant evidence for the incentive explanation.

Suggested Citation

  • Illoong Kwon, 2005. "Threat of Dismissal: Incentive or Sorting?," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 797-838, October.
    • Handle: RePEc:ucp:jlabec:v:23:y:2005:i:4:p:797-838
    DOI: 10.1086/491610
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/491610
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/491610?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
    2. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns of Mutual Fund Managers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 389-432.
    3. Conyon, Martin J, 1998. "Directors' Pay and Turnover: An Application to a Sample of Large UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(4), pages 485-507, November.
    4. Illoong Kwon, 2006. "Optimal Contracts for Long‐Term Decisions and the Threat of Dismissal," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 735-761, September.
    5. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    6. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    8. Sparks, Roger, 1986. "A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 560-581, October.
    9. Pier Angelo Mori, 1998. "Task Shifts vs. Termination as Devices for Eliciting Optimal Effort Supply," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 33-65, March.
    10. Kuhn, Peter, 1986. "Wages, Effort, and Incentive Compatibility in Life-Cycle Employment Contracts," Journal of Labor Economics, University of Chicago Press, vol. 4(1), pages 28-49, January.
    11. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-546, June.
    12. Guillermo A. Calvo, 1985. "The Inefficiency of Unemployment: The Supervision Perspective," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 373-387.
    13. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    14. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    15. Denis, David J & Denis, Diane K, 1995. "Performance Changes Following Top Management Dismissals," Journal of Finance, American Finance Association, vol. 50(4), pages 1029-1057, September.
    16. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    17. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Uwe Jirjahn, 2016. "Which employers regard the threat of dismissal as a suitable incentive to motivate workers?," Applied Economics Letters, Taylor & Francis Journals, vol. 23(9), pages 614-617, June.
    2. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2015. "Matching Firms, Managers, and Incentives," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 623-681.
    3. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2012. "Rewarding carrots and crippling sticks: Eliciting employee preferences for the optimal incentive design," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1247-1265.
    4. Kaori Narita & J.D. Tena & Babatunde Buraimo, 2022. "Causal and Consequences of Multiple Dismissals: Evidence from Italian Football League," Working Papers 202226, University of Liverpool, Department of Economics.
    5. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2009. "Rewarding Carrots & Crippling Sticks: Eliciting Employee Preferences for the Optimal Incentive Mix in Europe," MPRA Paper 14167, University Library of Munich, Germany.
    6. Hensvik, Lena & Rosenqvist, Olof, 2015. "The strength of the weakest link: sickness absence, internal substitutability and worker-firm matching," Working Paper Series 2015:28, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    7. Joshua D. Pitts & Brent A. Evans, 2023. "New contracts and dismissal threats from highly drafted rookies: What motivates NFL quarterbacks?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 4-16, January.
    8. Macera, Rosario, 2018. "Present or future incentives? On the optimality of fixed wages with moral hazard," Journal of Economic Behavior & Organization, Elsevier, vol. 147(C), pages 129-144.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lefgren, Lars J. & Platt, Brennan & Price, Joseph & Higbee, Samuel, 2019. "Outcome based accountability: Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 160(C), pages 121-137.
    2. Lausten, Mette, 2002. "CEO turnover, firm performance and corporate governance: empirical evidence on Danish firms," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 391-414, March.
    3. Paul André, 2009. "Discussion of Firm Performance and Managerial Succession in Family Managed Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 485-495, April.
    4. Chin-Tsai Lin & Yi-Hsien Wang, 2005. "An Analysis of Political Changes on Nikkei 225 Stock Returns and Volatilities," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 169-183, May.
    5. Alberto Chong & Florencio López-de-Silanes, 2007. "Investor Protection and Corporate Governance : Firm-Level Evidence Across Latin America," World Bank Publications - Books, The World Bank Group, number 6769, December.
    6. Illoong Kwon, 2006. "Optimal Contracts for Long‐Term Decisions and the Threat of Dismissal," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 735-761, September.
    7. Kraft, Kornelius & Niederprum, Antonia, 1999. "Determinants of management compensation with risk-averse agents and dispersed ownership of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 40(1), pages 17-27, September.
    8. Ricardo N. Bebczuk & André L. Carvalhal da Silva & Alberto E. Chong & Juan José Cruces & Urbi Garay & Maximiliano González & Luis H. Gutiérrez & Enrique Kawamura & Ricardo P. C. Leal & Fernando Lefort, 2007. "Investor Protection and Corporate Governance: Firm-level Evidence across Latin America," IDB Publications (Books), Inter-American Development Bank, number 59598 edited by Alberto E. Chong & Florencio López-de-Silanes, February.
    9. George A. Akerlof & Lawrence F. Katz, 1986. "Do Deferred Wages Dominate Involuntary Unemployment as a Worker Discipline Device?," NBER Working Papers 2025, National Bureau of Economic Research, Inc.
    10. Cools, Kees & Mirjam van Praag, C., 2007. "The value relevance of top executive departures: Evidence from the Netherlands," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 721-742, December.
    11. John, Kose & Ravid, S. Abraham & Sunder, Jayanthi, 2017. "Managerial ability and success: Evidence from the career paths of film directors," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 425-439.
    12. Bebczuk, Ricardo N. & Da Silva, André L. Carvalhal & Chong, Alberto E. & Cruces, Juan José & Garay, Urbi & González, Maximiliano & Gutiérrez, Luis H. & Kawamura, Enrique & Leal, Ricardo P. C. & Lefort, 2007. "Investor Protection and Corporate Governance: Firm-level Evidence across Latin America," IDB Publications (Books), Inter-American Development Bank, number 354.
    13. Pier Angelo Mori, 1998. "Task Shifts vs. Termination as Devices for Eliciting Optimal Effort Supply," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 33-65, March.
    14. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    15. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.
    16. Leslie Eldenburg & Benjamin E. Hermalin & Michael S. Weisbach & Marta Wosinska, 2001. "Hospital Governance, Performance Objectives, and Organizational Form," NBER Working Papers 8201, National Bureau of Economic Research, Inc.
    17. Chang, Eric C. & Wong, Sonia M.L., 2009. "Governance with multiple objectives: Evidence from top executive turnover in China," Journal of Corporate Finance, Elsevier, vol. 15(2), pages 230-244, April.
    18. Rachel M. Hayes & Paul Oyer & Scott Schaefer, 2006. "Coworker Complementarity and the Stability of Top-Management Teams," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(1), pages 184-212, April.
    19. Annita Florou, 2005. "Top Director Shake-up: The Link between Chairman and CEO Dismissal in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1-2), pages 97-128.
    20. Mikkelson, Wayne H. & Partch, M. Megan, 1997. "The decline of takeovers and disciplinary managerial turnover," Journal of Financial Economics, Elsevier, vol. 44(2), pages 205-228, May.
    21. Spagnolo, Giancarlo, 2005. "Managerial incentives and collusive behavior," European Economic Review, Elsevier, vol. 49(6), pages 1501-1523, August.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlabec:v:23:y:2005:i:4:p:797-838. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JOLE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.