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Retention of Capable New Employees under Uncertainty: Impact of Strategic Interactions

Yoo, OS; Kwon, HD; (2017) Retention of Capable New Employees under Uncertainty: Impact of Strategic Interactions. IISE Transactions , 49 (10) pp. 927-941. 10.1080/24725854.2017.1325028. Green open access

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Abstract

We study a game involving a firm and a newly hired employee whose capability is initially unknown to both parties. Both players observe the performance of the employee and update their common posterior beliefs about the employee’s capability. The learning process presents each party with an option: the firm can terminate an incapable employee, and a capable employee can leave the firm for greater financial remuneration elsewhere. To understand the impact of this noncooperative interaction, we examine the Markov perfect equilibrium termination strategies and payoffs that unfold. We find that in the region of sufficiently high learning rates, reducing the rate of learning can increase the equilibrium payoff for both parties. Slower learning prolongs the employment because more performance outcomes must be observed to fully assess the employee’s capability. In the region of sufficiently slow learning rates, reducing the rate of learning can benefit the firm if the employee is deemed capable but hurt the firm otherwise. Our result identifies a nonfinancial way for firms to improve retention of capable new employees.

Type: Article
Title: Retention of Capable New Employees under Uncertainty: Impact of Strategic Interactions
Open access status: An open access version is available from UCL Discovery
DOI: 10.1080/24725854.2017.1325028
Publisher version: http://dx.doi.org/10.1080/24725854.2017.1325028
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Bayesian sequential decision; employee retention; timing game; stochastic dynamic game
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/1553137
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