Employee Discharge and Reinstatement: Moral Hazards and the Mixed Consequences of Last Chance Agreements

The authors examine the consequences of workplace discipline practices involving the use of last chance agreements (LCAs)—contracts governing the non-arbitral reinstatement of discharged employees. Using data from one manufacturing firm's 15-year experience with LCAs, they explore the impact of LCA-based employee reinstatement on subsequent years' discharge rates. They also seek to identify individual and work-related factors predictive of individual reinstatement “success.†Consistent with moral hazard theory, the analysis shows evidence of a positive relationship between the number of LCAs signed in one year and the rate of discharge in subsequent years; and consistent with the theory of reintegrative shaming, LCAs appear to be most effective among those most susceptible to shaming.