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On the trade-off between efficiency in job assignment and turnover: the role of breakup fees

Mukherjee, Arijit and Vasconcelos, Luis (2018) 'On the trade-off between efficiency in job assignment and turnover: the role of breakup fees.' Journal of Law, Economics, and Organization, 43 (2). 230 - 271. ISSN 1465-7341

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Abstract

We highlight a novel trade-off with the use of breakup fees in employment contracts. Under asymmetric learning about workers’ productivity, the market takes job assignments (or “promotions”) as a signal of quality and bids up the wages of a promoted worker, leading to inefficiently few promotions (Waldman, M. 1984. “Job Assignments, Signalling, and Efficiency” 15 RAND Journal of Economics 255–67). Breakup fees can mitigate such inefficiencies by shielding the firm from labor-market competition, but they reduce turnover efficiency when there are firm-specific matching gains. We show that it is optimal to use breakup fees if and only if the difference between the worker’s expected productivity in the pre- and post-promotion jobs is small. Also, the relationship between the optimality of breakup fees and the importance of firm-specific human capital is more nuanced than what the extant literature may suggest.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 17 Sep 2018 13:41
Last Modified: 22 Feb 2020 02:00
URI: http://repository.essex.ac.uk/id/eprint/21196

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