CEO turnover in a competitive assignment framework

There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance is poor relative to the industry average. However, CEOs are also more likely to be replaced if the industry is doing badly. We show that these empirical patterns are natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics, and where industry conditions affect the outside options of both managers and firms. Our model also has several new predictions about the type of replacement manager, and their pay and performance. We construct a dataset which describes all turnover events during the period 1992-2006 and show that these predictions are also born out empirically.Executive Turnover; Matching Models; Competitive Assignment; CEO Labor Market

Rank expectations, feedback and social hierarchies

We develop and test experimentally a theoretical model of the role of self-esteem, generated by private feedback regarding relative performance, on the behavior of agents working on an effort provision task for a flat wage. Agents work harder and expect to rank better when they are told they may learn their ranking, relative to cases when they are told feedback will not be provided. Individuals who learn that they have ranked better than expected decrease their output but expect an even better rank in the future, while those who were told they ranked worse than expected increase their output and at the same time lower their rank expectations going forward. These effects are stronger in earlier rounds of the task, while subjects learn how they compare to their peers. This rank hierarchy is established early on, and remains relatively stable afterwards. Private relative rank information helps create a ratcheting effect in the group's average output, which is mainly due to the fight for dominance at the top of the hierarchy. Hence, in environments where monetary incentives are weak, moral hazard may be mitigated by providing feedback to agents regarding their relative performance, and by optimally choosing the reference peer group.rankings, incentives, feedback, moral hazard, intrinsic motivation, ego utility, self-esteem

Searching for Jobs: Evidence from MBA Graduates

This paper proposes and tests empirically a model of optimal job search using novel data on job seeking strategies of participants in the labor market for MBA graduates. Theoretically and empirically I find that the breadth of search that workers conduct depends on their ability, outside option, and fit with available jobs, as well as on the exogenous job application cost and the ex-ante probability of applications resulting in offers. These results illustrate the formation of the supply of human capital available to hiring companies, which drives the efficiency of matching between workers and firms and ultimately determines productivity.job search; matching; human capital; MBA education; career choice

Exploration for Human Capital: Evidence from the MBA Labor Market

We empirically investigate the effect of uncertainty on corporate hiring. Using novel data from the labor market for MBA graduates, we show that uncertainty regarding how well job candidates fit with a firm's industry hinders hiring and that firms value probationary work arrangements that provide the option to learn more about potential full-time employees. The detrimental effect of uncertainty on hiring is more pronounced when firms face greater firing and replacement costs and when they face less direct competition from other similar firms. These results suggest that firms faced with uncertainty use similar considerations when making hiring decisions as when making decisions regarding investment in physical capital

Socioeconomic status and learning from financial information

The majority of lower socioeconomic status (SES) households in the U.S. and Europe do not have stock investments, which is detrimental to wealth accumulation. Here, we examine one explanation for this puzzling fact, namely, that economic adversity may influence how people learn from financial information. Using experimental and survey data from the U.S. and Romania, we find that lower SES individuals form more pessimistic beliefs about the distribution of stock returns and are less likely to invest in stocks when these investments are likely to have good outcomes. SES-related differences in pessimism may help explain variation in investments across households

Searching for Jobs: Evidence from MBA Graduates

This paper proposes and tests empirically a model of optimal job search using novel data on job seeking strategies of participants in the labor market for MBA graduates. Theoretically and empirically I find that the breadth of search that workers conduct depends on their ability, outside option, and fit with available jobs, as well as on the exogenous job application cost and the ex-ante probability of applications resulting in offers. These results illustrate the formation of the supply of human capital available to hiring companies, which drives the efficiency of matching between workers and firms and ultimately determines productivity

Exploration for human capital: Theory and evidence from the MBA labor market

Drawing on insights from corporate finance and personnel economics, we show that firms consider potential employees using a real options approach, much as they do when making other types of capital investment decisions. Theoretically we find that firms’ hiring decisions are influenced by the uncertainty in workers’ productivity, competition in the labor market, adjustment costs, and redeployability concerns. Firms value probationary employment arrangements that provide the option to learn about the productivity of potential hires before permanent investment occurs. Higher uncertainty and adjustment costs hinder permanent investment and increase the value of the option to learn. Greater competition for workers speeds up firm investment and increases the value of probationary employment. Higher worker redeployability leads to more investment, if firms face sufficiently low competition. We test and confirm these predictions empirically using a novel dataset with detailed recruiting information from the labor market for MBA graduates

Feedback, self-esteem and performance in organizations.

W e examine whether private feedback about relative performance can mitigate moral hazard in competitive environments by modifying the agents' self-esteem. In our experimental setting, people work harder and expect to rank better when told that they may learn their ranking, relative to cases when feedback will not be provided. Individuals who ranked better than expected decrease output but expect a better rank in the future, whereas those who ranked worse than expected increase output but lower their future rank expectations. Feedback helps create a ratcheting effect in productivity, mainly because of the fight for dominance at the top of the rank hierarchy. Our findings suggest that organizations can improve employee productivity by changing the likelihood of feedback, the reference group used to calculate relative performance, and the informativeness of the feedback message

Exploration for human capital: Theory and evidence from the MBA labor market

Drawing on insights from corporate finance and personnel economics, we show that firms consider potential employees using a real options approach, much as they do when making other types of capital investment decisions. Theoretically we find that firms’ hiring decisions are influenced by the uncertainty in workers’ productivity, competition in the labor market, adjustment costs, and redeployability concerns. Firms value probationary employment arrangements that provide the option to learn about the productivity of potential hires before permanent investment occurs. Higher uncertainty and adjustment costs hinder permanent investment and increase the value of the option to learn. Greater competition for workers speeds up firm investment and increases the value of probationary employment. Higher worker redeployability leads to more investment, if firms face sufficiently low competition. We test and confirm these predictions empirically using a novel dataset with detailed recruiting information from the labor market for MBA graduates

Rank expectations, feedback and social hierarchies

We develop and test experimentally a theoretical model of the role of self-esteem, generated by private feedback regarding relative performance, on the behavior of agents working on an effort provision task for a flat wage. Agents work harder and expect to rank better when they are told they may learn their ranking, relative to cases when they are told feedback will not be provided. Individuals who learn that they have ranked better than expected decrease their output but expect an even better rank in the future, while those who were told they ranked worse than expected increase their output and at the same time lower their rank expectations going forward. These effects are stronger in earlier rounds of the task, while subjects learn how they compare to their peers. This rank hierarchy is established early on, and remains relatively stable afterwards. Private relative rank information helps create a ratcheting effect in the group's average output, which is mainly due to the fight for dominance at the top of the hierarchy. Hence, in environments where monetary incentives are weak, moral hazard may be mitigated by providing feedback to agents regarding their relative performance, and by optimally choosing the reference peer group