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Threat of Dismissal: Incentive or Sorting?

Author

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  • Illoong Kwon

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 paper develops a dynamic incentive model of dismissal and proposes a methodology to distinguish between these two explanations. The methodology rests on the learning-by-doing and the changes in the slope of dismissal probability with respect to tenure. With our unique personnel data, we find significant evidence for the incentive explanation

Suggested Citation

  • Illoong Kwon, 2004. "Threat of Dismissal: Incentive or Sorting?," Econometric Society 2004 North American Summer Meetings 114, Econometric Society.
  • Handle: RePEc:ecm:nasm04:114
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    References listed on IDEAS

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    1. 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.
    2. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
    3. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    4. 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.
    5. 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.
    6. Guillermo A. Calvo, 1985. "The Inefficiency of Unemployment: The Supervision Perspective," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 373-387.
    7. 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.
    8. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns of Mutual Fund Managers," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 389-432.
    9. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    10. 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.
    11. 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.
    12. 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.
    13. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    14. 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.
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    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. 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.
    4. 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.
    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.

    More about this item

    Keywords

    Dismissal; Moral Hazard; Sorting; Learning;

    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

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