Firms may fire productive workers they actually need simply to prove that their new AI systems are working.
This paper reveals a 'performance paradox' where companies use mass layoffs as a signaling tool. To force employees to be honest about which jobs can be automated, firms must follow through with terminations even when it destroys value by dismissing workers the AI can't actually replace.
Successfully Fired: The Unique Incentives of Agentic-AI Adoption *
SSRN · 6387338
We study optimal incentive contracts when workers privately observe whether Agentic AI can automate their jobs. Firms balance bonuses for truthful reports of successful automation with termination threats. Workers may be fired regardless of automation success (mass termination), even though dismissing non-automatable workers destroys value. Mass termination becomes more likely when automation probability rises or workers capture more surplus. Firm value is convex in automation probability, while