Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Employment Contracts C04-V3
The longer an agent is employed in a job, the more the principal will have learned about his ability through the history of performance. With implicit incentives, influence perceptions and effort incentives decrease over time. Rotating agents to a different job deletes learning effects about ability, creating fresh impetus for effort. However, job rotation also reduces the time horizon, and thus reduces rents from working and also incentives. In this trade-off, we derive conditions for the desirability of job rotation and show how in the presence of career concerns job rotation may emerge endogenously. Finally, our model allows for more general comments on the optimal rotation frequency as well as the preferred organizational design of a firm.