Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83564
Year of Publication: 
2006
Series/Report no.: 
MNB Working Papers No. 2006/2
Publisher: 
Magyar Nemzeti Bank, Budapest
Abstract: 
Firms offer highly complex contracts to their employees. These contracts contain a mix of various incentives, such as fixed wages, bonuses, promise of promotion, and threat of firing. This paper aims at explaining the reason why this incentive- mix arises. In particular, the model focuses on why firms are combining promotions and bonuses with firing. The theoretical model proposed is a job-assignment model with heterogeneous employees. In this model the firm is concerned about job assignment, because the overall productivity of the firm depends upon the quality of the employees and their allocation to jobs. The model shows that firing has a dual role. Firing creates incentives for the employees, and it is used as a sorting device that allows the firm to improve workforce quality. Thus, quality-concerned firms might want to combine cost-efficient incentives such as promotions and bonuses with firing. To comply with the Gibbons and Waldman critique, a large set of the model’s broader predictions is stated explicitly and tested on the personnel records from a large pharmaceutical company. The model’s predictions are shown to be consistent with the data.
Subjects: 
personnel economics
incentive mix
layoffs
JEL: 
J30
J41
M50
Document Type: 
Working Paper

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