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Anders Frederiksen, Előd Takáts, Promotions, Dismissals, and Employee Selection: Theory and Evidence, The Journal of Law, Economics, and Organization, Volume 27, Issue 1, April 2011, Pages 159–179, https://doi.org/10.1093/jleo/ewp017
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Abstract
Firms offer highly complex contracts to their employees. These contracts contain a mix of incentives, such as fixed wages, bonus payments, promotion options, and dismissals or threats of dismissal. In this article, we show that firms having a production process that is sensitive to employee quality may find it optimal to combine cost-efficient incentives such as bonuses and promotions with dismissals. Based on this result, we derive a hierarchy of incentives. Furthermore, we demonstrate the close link between the optimal contract and the employee sorting and selection and use this to analyse the information conveyed in employment matches.