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Managerial Turnover in a Changing World

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  • 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.

Suggested Citation

  • Daniel Garrett & Alessandro Pavan, 2010. "Managerial Turnover in a Changing World," Discussion Papers 1490, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1490
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    File URL: http://faculty.wcas.northwestern.edu/~apa522/Turnover.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    managerial turnover; termination clauses; dynamic mechanism design; adverse selection; moral hazard;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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