On the Incentive Effect of Job Rotation

Abstract

A new employee may work hard to build his reputation. However, the longer he is employed in his job, the more the firm will have learned about his ability. When there are career concerns, the incentives for an employee to influence the firm's perceptions of his ability decrease over time. Rotating the employee to a different job results in information loss regarding ability, thereby adding fresh impetus for effort. However, job rotation also reduces the time horizon, thus reducing future rents from effort. We show that a simple rule of thumb for an optimal assignment duration is 4 periods multiplied by the ratio of output uncertainty to prior type uncertainty. Then, we study several extensions: different bargaining positions, partial information loss, as well as learning by doing effects.

Keywords: Career concerns, job rotation, task assignment, learning, incentives, reputation.

JEL Classification: D83, J24, L23