Job Protection vs. Contracts At-Will: Trading-off Entrenchment and Shirking

I take an efficient contracting approach to answer the question how much "job protection" to offer employees, in particular those at the top of organizations. Given their privileged information or formal authority, senior managers who are not given such protection are likely to take opportunistic actions that make them less dispensable. The optimal employment contract trades off the resulting inefficiencies that arise from such "self made" job security with the reduced incentives and higher compensation costs under explicit employment protection. One implication of the model is that more senior managers, such as CEOs, should receive both higher rents and more protection, e.g., through contracts that are explicitly not at-will or that specify a longer duration.