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). pp. 230-271. DOI https://doi.org/10.1093/jleo/ewy003
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). pp. 230-271. DOI https://doi.org/10.1093/jleo/ewy003
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). pp. 230-271. DOI https://doi.org/10.1093/jleo/ewy003
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 |
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Subjects: | H Social Sciences > HB Economic Theory |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Economics, Department of |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 17 Sep 2018 13:41 |
Last Modified: | 06 Jan 2022 13:46 |
URI: | http://repository.essex.ac.uk/id/eprint/21196 |
Available files
Filename: Breakup fee.pdf