A Markov chain model of military personnel dynamics

Personnel retention is one of the most significant challenges faced by the US Army. Central to the problem is understanding the incentives of the stay-or-leave decision for military personnel. Using three years of data from the US Department of Defense, we construct and estimate a Markov chain model of military personnel. Unlike traditional classification approaches, such as logistic regression models, the Markov chain model allows us to describe military personnel dynamics over time and answer a number of managerially relevant questions. Building on the Markov chain model, we construct a finite-horizon stochastic dynamic programming model to study the monetary incentives of stay-or-leave decisions. The dynamic programming model computes the expected pay-off of staying versus leaving at different stages of the career of military personnel, depending on employment opportunities in the civilian sector. We show that the stay-or-leave decisions from the dynamic programming model possess surprisingly strong predictive power, without requiring personal characteristics that are typically employed in classification approaches. Furthermore, the results of the dynamic programming model can be used as an input in classification methods and lead to more accurate predictions. Overall, our work presents an interesting alternative to classification methods and paves the way for further investigations on personnel retention incentives.