Standard promotion practices versus up-or-out contracts

Authors


  • We would like to thank Robert Gibbons, Hodaka Morita, the editor, Mark Armstrong, two anonymous referees, and seminar and conference participants at Cornell University, Queens University, University of California, Riverside, University of Miami, the 2004 NBER Personnel Economics Conference, the 2004 Royal Economic Society Annual Conference, the 2005 Econometric Society World Congress, and the 2008 Tournaments, Contests, and Relative Performance Evaluation Conference for helpful comments.

Abstract

This article develops a theory concerning the choice between standard promotion practices and up-or-out contracts. Our theory is based on asymmetric learning and promotion incentives. We find that firms employ up-or-out contracts when firm-specific human capital is low and standard promotion practices when it is high. We also find that, if commitment to a wage floor is feasible and effort provision is important, up-or-out is employed when low- and high-level jobs are similar. These results are consistent with many of the settings in which up-or-out is typically observed, such as law firms and academia.

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