IDEAS home Printed from https://ideas.repec.org/a/kap/decono/v167y2019i4d10.1007_s10645-019-09347-9.html
   My bibliography  Save this article

Paid to Quit

Author

Listed:
  • Robert Dur

    (Erasmus University Rotterdam, Tinbergen Institute
    IZA
    CESifo)

  • Heiner Schmittdiel

    (Erasmus University Rotterdam, Tinbergen Institute)

Abstract

Inspired by a recent observation about an online retail company, this paper explains why a firm may find it optimal to offer an exit bonus to recent hires so as to induce self-selection. We study a double adverse selection problem, in which the principal can neither observe agents’ commitment to the job nor their intrinsic motivation. A steep wage-tenure profile deters uncommitted agents from applying. An exit bonus can stimulate that—among the committed agents—those who discovered that they are not intrinsically motivated for the job discontinue employment with the principal. Our key findings are that offering an exit bonus increases profits when the first adverse selection problem is sufficiently severe compared to the second and that the exit bonus needs to come as a surprise for the agents in order to function well.

Suggested Citation

  • Robert Dur & Heiner Schmittdiel, 2019. "Paid to Quit," De Economist, Springer, vol. 167(4), pages 387-406, December.
    • Handle: RePEc:kap:decono:v:167:y:2019:i:4:d:10.1007_s10645-019-09347-9
    DOI: 10.1007/s10645-019-09347-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10645-019-09347-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10645-019-09347-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dana Foarta & Takuo Sugaya, 2021. "The management of talent: Optimal contracting for selection and incentives," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 49-77, March.
    2. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-307, May.
    3. Roman Inderst & Holger M. Mueller, 2010. "CEO Replacement Under Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
    4. Rama, Martin, 1999. "Public Sector Downsizing: An Introduction," The World Bank Economic Review, World Bank, vol. 13(1), pages 1-22, January.
    5. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 699-726.
    6. Jeon, Doh-Shin & Laffont, Jean-Jacques, 1999. "The Efficient Mechanism for Downsizing the Public Sector," The World Bank Economic Review, World Bank, vol. 13(1), pages 67-88, January.
    7. Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
    8. Yermack, David, 2006. "Golden handshakes: Separation pay for retired and dismissed CEOs," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 237-256, September.
    9. repec:hal:pseose:halshs-01313694 is not listed on IDEAS
    10. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    11. Florian Ederer & Richard Holden & Margaret Meyer, 2018. "Gaming and strategic opacity in incentive provision," RAND Journal of Economics, RAND Corporation, vol. 49(4), pages 819-854, December.
    12. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    13. Donald O. Parsons, 2019. "The Simple Analytics Of Job Displacement Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(2), pages 351-380, June.
    14. Booth, Alison & Chatterji, Monojit, 1989. "Redundancy Payments and Firm-Specific Training," Economica, London School of Economics and Political Science, vol. 56(224), pages 505-521, November.
    15. Timothy J. Hatton, 2004. "Seeking asylum in Europe [‘Violence against citizens in civil wars: looting or terror?’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 19(38), pages 6-62.
    16. Philippe Jehiel, 2015. "On Transparency in Organizations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(2), pages 736-761.
    17. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 489-520.
    18. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    19. Ito, Takatoshi, 1988. "Labor Contracts with Voluntary Quits," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 100-131, January.
    20. George A. Akerlof & Hajime Miyazaki, 1980. "The Implicit Contract Theory of Unemployment meets the Wage Bill Argument," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(2), pages 321-338.
    21. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    22. Kahn, Charles M, 1985. "Optimal Severance Pay with Incomplete Information," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 435-451, June.
    23. Delfgaauw, Josse & Dur, Robert, 2007. "Signaling and screening of workers' motivation," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 605-624, April.
    24. Lambert, Richard A. & Larcker, David F., 1985. "Golden parachutes, executive decision-making, and shareholder wealth," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 179-203, April.
    25. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-459, December.
    26. Ernst-Ludwig Von Thadden & Xiaojian Zhao, 2012. "Incentives for Unaware Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1151-1174.
    27. Handy, Femida & Katz, Eliakim, 1998. "The Wage Differential between Nonprofit Institutions and Corporations: Getting More by Paying Less?," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 246-261, June.
    28. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 37-50.
    29. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
    30. Edward P. Lazear, 2006. "Speeding, Terrorism, and Teaching to the Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 1029-1061.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Josse Delfgaauw & Robert Dur, 2008. "Incentives and Workers' Motivation in the Public Sector," Economic Journal, Royal Economic Society, vol. 118(525), pages 171-191, January.
    2. Pissarides, Christopher, 2002. "Consumption and savings with unemployment risk: implications for optimal employment contracts," LSE Research Online Documents on Economics 2211, London School of Economics and Political Science, LSE Library.
    3. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    4. Carstensen, Vivian, 1999. "Beschäftigungssicherung durch Arbeitszeitflexibilisierung," Hannover Economic Papers (HEP) dp-228, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    5. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    6. Carstensen, Vivian, 2000. "Employment Stability via Annualized Hours Contracts," Hannover Economic Papers (HEP) dp-230, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Lloyd Ulman, 1992. "Why Should Human Resource Managers Pay High Wages?," British Journal of Industrial Relations, London School of Economics, vol. 30(2), pages 177-212, June.
    8. Michael Vlassopoulos, 2017. "‘Putting a Foot in the Door’: Volunteer Hiring and Organizational Form," Manchester School, University of Manchester, vol. 85(2), pages 133-162, March.
    9. John Geanakoplos & Takatoshi Ito, 1982. "On Implicit Contracts and Involuntary Unemployment," Cowles Foundation Discussion Papers 640, Cowles Foundation for Research in Economics, Yale University.
    10. repec:eee:labchp:v:2:y:1986:i:c:p:1001-1035 is not listed on IDEAS
    11. Lazear, Edward P, 1984. "Incentives and Wage Rigidity," American Economic Review, American Economic Association, vol. 74(2), pages 339-344, May.
    12. André Zylberberg, 1994. "Effort et contrats : quelques enseignements concernant le marché du travail," Économie et Prévision, Programme National Persée, vol. 113(2), pages 1-20.
    13. Pissarides, Christopher, 2002. "Consumption and Savings with Unemployment Risk: Implications for Employment Contracts," CEPR Discussion Papers 3367, C.E.P.R. Discussion Papers.
    14. Booth, Alison L. & Zoega, Gylfi, 2003. "On the welfare implications of firing costs," European Journal of Political Economy, Elsevier, vol. 19(4), pages 759-775, November.
    15. Robert H. Topel & Finis Welch, 1986. "Efficient Labor Contracts with Employment Risk," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 490-507, Winter.
    16. John Haltiwanger, 1982. "Specific CApital, Long Term Implicit Contracts, and Temporary Layoffs," UCLA Economics Working Papers 245, UCLA Department of Economics.
    17. Doh-Shin Jeon & Joel Shapiro, 2004. "Downsizing, Job Insecurity, and Firm Reputation," Working Papers 144, Barcelona School of Economics.
    18. Christopher A. Pissarides, 2010. "Why Do Firms Offer ‘Employment Protection’?," Economica, London School of Economics and Political Science, vol. 77(308), pages 613-636, October.
    19. Arzu Yavuz, 2011. "Productivity and Wage Differentials between Private and Public Sector in the Developing Countries (Gelismekte Olan �lkelerde �zel ve Kamu Sekt�r�ndeki Verimlilik ve �cret Farklilasmasi)," Working Papers 1103, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    20. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    21. Jonathan P. Thomas, 2000. "Fair pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability," Labor and Demography 0004004, University Library of Munich, Germany.
    22. Schob, Ronnie & Wildasin, David E., 2007. "Economic integration and labor market institutions: Worker mobility, earnings risk, and contract structure," Regional Science and Urban Economics, Elsevier, vol. 37(2), pages 141-164, March.
    23. Gordon, Robert J, 1982. "Why U.S. Wage and Employment Behaviour Differs from That in Britain and Japan," Economic Journal, Royal Economic Society, vol. 92(365), pages 13-44, March.

    More about this item

    Keywords

    Intrinsic motivation; Commitment; Self-selection; Wage compensation; Exit bonus; Transparency;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:decono:v:167:y:2019:i:4:d:10.1007_s10645-019-09347-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.