On the trade-off between efficiency in job assignment and turnover: The role of breakup fees

Mukherjee, A; Vasconcelos, L

On the trade-off between efficiency in job assignment and turnover: The role of breakup fees

Mukherjee, A Vasconcelos, L

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Publication Type:: Journal Article
Citation:: Journal of Law, Economics, and Organization, 2018, 34 (2), pp. 230 - 271
Issue Date:: 2018-05-01

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Field	Value	Language
dc.contributor.author	Mukherjee, A	en_US
dc.contributor.author	Vasconcelos, L https://orcid.org/0000-0002-2952-5674	en_US
dc.date.available	2020-05-25T19:18:50Z
dc.date.issued	2018-05-01	en_US
dc.identifier.citation	Journal of Law, Economics, and Organization, 2018, 34 (2), pp. 230 - 271	en_US
dc.identifier.issn	8756-6222	en_US
dc.identifier.uri	http://hdl.handle.net/10453/135812
dc.description.abstract	© The Author(s) 2018. We highlight a novel trade-off with the use of breakup fees in employment contracts. Under asymmetric learning about workers productivity, the market takes job assignments (or promotions) as a signal of quality and bids up the wages of a promoted worker, leading to inefficiently few promotions (Waldman, M. 1984. Job Assignments, Signalling, and Efficiency 15 RAND Journal of Economics 25567). Breakup fees can mitigate such inefficiencies by shielding the firm from labor-market competition, but they reduce turnover efficiency when there are firm-specific matching gains. We show that it is optimal to use breakup fees if and only if the difference between the worker's expected productivity in the pre- and post-promotion jobs is small. Also, the relationship between the optimality of breakup fees and the importance of firm-specific human capital is more nuanced than what the extant literature may suggest. (JEL D82, M5).	en_US
dc.relation.ispartof	Journal of Law, Economics, and Organization	en_US
dc.relation.isbasedon	10.1093/jleo/ewy003	en_US
dc.rights	info:eu-repo/semantics/openAccess
dc.subject.classification	Economics	en_US
dc.title	On the trade-off between efficiency in job assignment and turnover: The role of breakup fees	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	34	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1801 Law	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	open_access	*
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	34	en_US

Abstract:

© The Author(s) 2018. We highlight a novel trade-off with the use of breakup fees in employment contracts. Under asymmetric learning about workers productivity, the market takes job assignments (or promotions) as a signal of quality and bids up the wages of a promoted worker, leading to inefficiently few promotions (Waldman, M. 1984. Job Assignments, Signalling, and Efficiency 15 RAND Journal of Economics 25567). Breakup fees can mitigate such inefficiencies by shielding the firm from labor-market competition, but they reduce turnover efficiency when there are firm-specific matching gains. We show that it is optimal to use breakup fees if and only if the difference between the worker's expected productivity in the pre- and post-promotion jobs is small. Also, the relationship between the optimality of breakup fees and the importance of firm-specific human capital is more nuanced than what the extant literature may suggest. (JEL D82, M5).

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http://hdl.handle.net/10453/135812