Samuel Estreicher (New York University Law School) has posted Employer Reputation at Work
on SSRN. Here is the abstract:
Employer
reputational costs – that is, the loss in value of the firm’s
reputational assets if the firm reneges on its promises to workers,
both express and implied, – has played an important role in the
economic literature of employment contracts, but this factor has itself
generated little sustained analysis. Reputation is often offered as a
late-appearing deus ex machina explaining why opportunistic behavior by
employers even in internal labor markets is likely to be relatively
unimportant.This standard explanation for the enforceability
of implicit labor contracts in internal labor markets is problematic
for at least three reasons. It assumes a well-functioning market in
information about past and projected firm behavior, for a loss in
employer reputation can only occur if job applicants from the external
labor market are able readily to distinguish between "opportunistic"
behavior (where, say, a termination of employment reflects an
employer’s reneging on implied promises of deferred compensation or
late-career immunity from close monitoring of performance) and
legitimate behavior (where a discharge reflects an appropriate response
to shirking on the job or unforeseen business conditions). Second, the
reputational-loss account is a static one; it assumes that employers in
the first period (when they make the implied promise of deferred
compensation or late-career job security) are in the same product
market position in the later period (when they are expected to perform
these implied promises). If the employer in the later period has
disappeared, operates in a different product market, or has a need for
workers with a different skill mix than in the first period, it will
become even more difficult for job applicants in the external labor
market to evaluate whether the firm’s past behavior is a good predictor
of their probable job experience with that firm. Finally, the
explanation also makes certain problematic assumptions about how
workers process information.The deficiencies of the standard
explanation require either a reconsideration of implied labor market
theory, or implied labor market arrangements remain economically
desirable an identification and possible strengthening of institutions
that might enhance the firm’s reputational costs in breaking promises
to workers.