Job Matching with Prior Information and Managerial Appointment Contract

When a candidate for the top management position is pre-associated with the firm, prior information exists that partially reveals his suitability for the position. In a dynamic framework of job matching, we show that in the presence of such pre-appointment information, the firm’s decision on managerial appointment differs in significant ways between inside and outside candidates. The differences involve the timing of appointment (as when an inside or outside manager is appointed) and the terms of employment contract (pay amount, pay-performance sensitivity, and termination). The model provides a unified job-matching explanation of a variety of phenomena in managerial departure and succession. JEL classification: G30; J33 ; J63