- American Economic Journal: Microeconomics (Forthcoming)
We examine the relationship between job security and productivity, in
a fixed wage worker-firm relationship facing match quality uncertainty.
The worker’s action affects both learning and current productivity. The
firm, seeing worker behavior and outcomes, makes a firing decision. As
bad news accrues, the firm cannot commit to retain the worker. This creates
perverse incentives: the worker strategically slows learning, harming
productivity. We fully characterize the unique equilibrium in our
continuous-time game. Consistent with some evidence in organizational
psychology, the relationship between job insecurity and productivity is
U-shaped: a worker is least productive when his job is moderately secure.
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