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Hiring and Firing: A Tale of Two Thresholds

Alison L. Booth¹; Yu‐Fu Chen²; Gylfi Zoega

¹ University of Essex · ² University of Dundee

The negative effect of quits on the willingness of firms to provide on‐the‐job training is well documented in the theoretical literature. Here we explore the strength of this effect by solving a firm’s dynamic optimization problem where there is uncertainty about future productivity and nonzero firing costs. We find that the degree to which quit rates affect hiring depends on the ratio of firing to hiring costs. As this ratio rises, the negative effect of quits becomes less important, eventually reversing itself. We also describe how quit rates affect the firing decision. We highlight some testable implications of our analysis.

DOI

10.1086/338217

Volume

20 (2)

Pages

217-248

Language

en

Export

BibTeX

Sources

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