A cost of leaving model of the response to buyout plans: Quality effects of downsizing in the Naval Officer Corps

The decision to remain or separate from the Navy is addressed in a utility-maximizing framework, whereby an officer makes a retention choice by a comparison of the expected present discounted values of remaining in the Navy and the best civilian alternative. The value of staying in the military depends on expectations of future promotion outcomes. Officer promotions resemble a tournament where those not selected can become subject to involuntary separation. The empirical investigation uses official Navy performance evaluations and data on promotion outcomes to incorporate an officer's expectation of promotion probability based on performance relative to peers. This expectation of career success is used in the determination of the expected intra-Navy wage profile. The model then specifically investigates whether officer effectiveness is related to buyout-plan-induced quit behavior.;The results suggest that the Navy's buyout program is most appealing to the lower performing officers. It is also demonstrated that these officers have lower promotion probabilities. This is consistent with traditional economic theory that states that labor mobility serves as a sorting mechanism which allows mismatched workers to move to their highest valued use. Since future wages are uncertain, then workers instead make mobility decisions based on expected wage growth. As career information becomes revealed, workers realizing reduced opportunities for promotion revise their expected wage profile and may decide to move to alternative employment presenting a better worker/job fit. Buyout programs reduce the mobility costs that hinder efficient turnover. The Navy's separation incentives are having the effect of increasing the average quality of officers as their quantity decreases.