Optimal tolerance for failure

We consider the problem of an employer who has to choose whether to reemploy agents with a positive track record or agents who were unsuccessful. While previously successful managers are likely to be of high ability, they have also accumulated wealth and will be harder to motivate in the future. It may hence be optimal to retain unsuccessful managers but not successful ones. The result that the optimal tenure of a manager may not be increasing in his success is consistent with empirical studies that find a low correlation between firm success and managerial turnover.