Learning-by-employing: the value of commitment
We analyze a dynamic principal–agent model where an infinitely-lived principal faces a sequence of finitely-lived agents who differ in their ability to produce output. The ability of an agent is initially unknown to both him and the principal. An agent’s effort affects the information on ability that is conveyed by performance. We characterize the equilibrium contracts and show that they display short–term commitment to employment when the impact of effort on output is persistent but delayed. By providing insurance against early termination, commitment encourages agents to exert effort, and thus improves on the principal’s ability to identify their talent. We argue that this helps explain the use of probationary appointments in environments in which there exists uncertainty about individual ability.
|Date of creation:||24 Jun 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Rua Itapeva, 474, 13o andar, CEP 01332-000, São Paulo - SP|
Phone: 55 (011) 3799-3350
Fax: 55 (011) 3799-3357
Web page: http://eesp.fgv.br
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- O'Flaherty, Brendan & Siow, Aloysius, 1995.
"Up-or-Out Rules in the Market for Lawyers,"
Journal of Labor Economics,
University of Chicago Press, vol. 13(4), pages 709-35, October.
When requesting a correction, please mention this item's handle: RePEc:fgv:eesptd:219. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Núcleo de Computação da EPGE)
If references are entirely missing, you can add them using this form.