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Managerial Turnover in a Changing World

Author Info

  • 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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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
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Handle: RePEc:nwu:cmsems:1490
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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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  1. Alex Edmans & Xavier Gabaix, 2009. "Tractability in Incentive Contracting," NBER Working Papers 15545, National Bureau of Economic Research, Inc.
  2. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: A Mechanism Design Approach," 2009 Meeting Papers 375, Society for Economic Dynamics.
  6. 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.
  7. Alessandro Pavan & Ilya Segal & Juuso Toikka, 2009. "Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure," Discussion Papers 1501, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
  9. Arijit Sen, 1996. "Termination Clauses in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 473-496, December.
  10. David McAdams, 2011. "Performance and Turnover in a Stochastic Partnership," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 107-42, November.
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