Reputation Concerns Under At-Will Employment
42 Pages Posted: 26 Jul 2019
Date Written: April 30, 2019
We study a continuous-time model of long-run employment relationship with ﬁxed wage and at-will ﬁring; that is, termination of the relationship is non-contractible. Depending on his type, the worker either always works hard, or can freely choose his effort level. The ﬁrm does not know the worker’s type and the monitoring is imperfect. We show that, in the unique Markov equilibrium, as the worker’s reputation worsens, his job becomes less secure and the strategic worker works harder. We further demonstrate that the relationship between average productivity and job insecurity is U shaped, which is consistent with typical ﬁndings in the organizational psychology literature.
Keywords: moral hazard, job insecurity, reputation, at-will employment
JEL Classification: C73, D83, J24, M51
Suggested Citation: Suggested Citation