Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence

Anders Frederiksen () and Elod Takats

No 2006/2, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

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.

Keywords: personnel economics; incentive mix; layoffs. (search for similar items in EconPapers)
JEL-codes: J30 J41 M50 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2006
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence (2006)
Working Paper: Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence (2005)
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