Employee Bonding and Turnover Efficiency

I revisit the role that bonding contracts, such as pension or minimum employment terms, have on employee turnover. I focus on efficiency of such bonds as well as the necessary contractual structure that it must have in competitive labor markets. I develop a two stage turnover model that, in the absence of bonding contracts, results in inefficiently high quit rates. I find that bonding contracts only reduce turnover if they are structured effectively; the agent who sets the workers' wages must not have claim on the bond should the worker decide to quit. This finding is consistent with previous empirical literature that suggests that pensions given at larger companies have a greater effect on turnover and total compensation than pensions offered at smaller companies. I then show how bonding may be more or less important based on the amount of firm specific learning by doing inherent to that job. Finally, I compare the predictions of this model to the vast empirical literature on pensions and tuition reimbursement plans