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Management Science 60, 1 (2014) 110-129
We study the hiring and retention of heterogeneous workers who learn over time. We show that the problem can be analyzed as an infinite-armed bandit with switching costs and apply results from Bergemann and V¨alim¨aki (2001) to characterize the optimal hiring and retention policy. For problems with Gaussian data, we develop approximations that allow the efficient implementation of the optimal policy and the evaluation of its performance. Our numerical examples demonstrate that the value of active monitoring and screening of employees can be substantial.