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Garrett, Daniel
Pavan, Alessandro
Year of Publication: 
Series/Report no.: 
Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1490
We characterize a firm's profit-maximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the managers' private information. Our key positive result shows that the productivity level that the firm requires for retention declines with the managers' 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.
managerial turnover
termination clauses
dynamic mechanism design
adverse selection
moral hazard
Document Type: 
Working Paper

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