Managerial Turnover in a Changing World
53 Pages Posted: 1 Jun 2010
Date Written: May 1, 2010
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 manager's 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.
Keywords: managerial turnover, termination clauses, dynamic mechanism design, adverse selection, moral hazard
JEL Classification: D82
Suggested Citation: Suggested Citation