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Managerial Turnover in a Changing World

Author Info

Listed author(s):
  • Daniel Garrett
  • Alessandro Pavan

Abstract

We characterize a firm's profit-maximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the manager's private information. Our key positive result shows that the productivity level that the firm requires for retention declines with the manager's tenure in the firm. Our key normative result shows that, compared to what is efficient, the profit-maximizing policy either induces excessive retention (i.e., inefficiently low turnover) at all tenure levels, or excessive firing at the early stages of the relationship followed by excessive retention after sufficiently long tenure.

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File URL: http://faculty.wcas.northwestern.edu/~apa522/Turnover.pdf
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1490.

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Date of creation: 01 May 2010
Handle: RePEc:nwu:cmsems:1490
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Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014

Phone: 847/491-3527
Fax: 847/491-2530
Web page: http://www.kellogg.northwestern.edu/research/math/
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Keywords: managerial turnover; termination clauses; dynamic mechanism design; adverse selection; moral hazard;

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Find related papers by JEL classification:
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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  11. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc.
  12. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 229-265.
  13. Said, Maher, 2012. "Auctions with dynamic populations: Efficiency and revenue maximization," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2419-2438.
  14. B. Caillaud & R. Guesnerie & P. Rey, 1992. "Noisy Observation in Adverse Selection Models," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 595-615.
  15. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
  16. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2681-2724, December.
  17. Moldovanu, Benny & Dizdar, Deniz & Gershkov, Alex, 2011. "Revenue maximization in the dynamic knapsack problem," Theoretical Economics, Econometric Society, vol. 6(2), May.
  18. Daniel Garrett & Alessandro Pavan, 2014. "Dynamic Managerial Compensation: On the Optimality of Seniority-based Schemes," Discussion Papers 1579, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. David McAdams, 2011. "Performance and Turnover in a Stochastic Partnership," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 107-142, November.
  20. Arijit Sen, 1996. "Termination Clauses in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 473-496, December.
  21. Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: A Mechanism Design Approach," 2009 Meeting Papers 375, Society for Economic Dynamics.
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