Managerial Turnover in a Changing World

We develop a dynamic theory of managerial turnover in a world where the quality of the match between a Örm and its managers changes stochastically over time. Shocks to managerial productivity are anticipated at the time of contracting but privately observed by the managers. Our key positive result shows that the Örmís optimal retention decisions become more permissive with time. Our key normative result shows that, compared to what is e¢ cient, the Örmís contract either induces excessive retention at all tenure levels, or excessive Öring at the early stages of the relationship, followed by excessive retention after su¢ ciently long tenure