Learning-by-employing: The value of commitment under uncertainty

Braz Camargo, Elena Pastorino

Research output: Contribution to journalArticle

Abstract

We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability. A worker’s ability is initially unknown, and a worker’s effort affects how informative about ability the worker’s performance is. We show that equilibria display commitment to employment only when effort has a delayed impact on output. In this case, insurance against early termination encourages workers to exert effort, thus allowing the firm to better identify workers’ ability. Our results help explain the use of probationary appointments in environments inwhich workers’ ability is uncertain.

Original languageEnglish (US)
Pages (from-to)581-620
Number of pages40
JournalJournal of Labor Economics
Volume34
Issue number3
DOIs
StatePublished - Jul 2016

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