Learning-by-Employing: The Value of Commitment under Uncertainty

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 to produce output. A worker's ability is initially unknown to both the worker and the firm. A worker's effort affects the information on ability conveyed by his performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment to employment encourages workers to exert effort, thus improving the firm's ability to identify workers' talent. The incentive value of commitment to retention helps explain the use of probationary appointments in environments in which there is uncertainty about individual ability.

Adverse Selection, Learning, and Competitive Search

“…They find that the optimal probation period increases in response to an increase in monitoring costs. Camargo and Pastorino (2016) define probation as a short-term commitment of 132 mayr-dorn firms to employment and show that it can be optimal, if worker effort has a delayed impact on output. In comparison to all these papers, I am the first to consider probation as a feature in frictional labor markets.…”

“…In my model, high-ability workers are underemployed in separating equilibrium instead of overemployed, as inGuerrieri et al (2010).8 InGonzalez and Shi (2010), there is worker learning about their own job-finding process in a directed search framework. 9 Empirical evidence is described, for example, inBarlevy and Neal (2019) andCamargo and Pastorino (2016).…”