Learning-by-Employing: The Value of Commitment under Uncertainty

Braz Camargo () and Elena Pastorino ()

Journal of Labor Economics, 2016, vol. 34, issue 3, 581 - 620

Abstract: We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability. A worker’s ability is initially unknown, and a worker’s effort affects how informative about ability the worker’s performance is. We show that equilibria display commitment to employment only when effort has a delayed impact on output. In this case, insurance against early termination encourages workers to exert effort, thus allowing the firm to better identify workers’ ability. Our results help explain the use of probationary appointments in environments in which workers’ ability is uncertain.

Date: 2016
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Working Paper: Learning-by-employing: the value of commitment under uncertainty (2012)
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