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Internal labor markets and worker rents

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  • Kräkel, Matthias
  • Schöttner, Anja

Abstract

We show that establishing an internal labor market by offering combined contracts across hierarchy levels strictly dominates external recruitment when workers are homogeneous. The reason is that only an internal labor market can exploit higher tier rents for incentive provision on lower tiers. Given unobservable heterogeneity of workers, relying on an internal labor market has the further advantage of improving the selection of high ability workers for higher ranks, which is complemented by rent-based incentive schemes. However, observable worker heterogeneity gives rise to a trade-off between incentive and selection issues and may lead to ports of entry on higher tiers of the hierarchy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 2 ()
Pages: 491-509

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:2:p:491-509

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Bonuses; Internal labor market; Job promotion; Limited liability; Tournaments;

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References

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Cited by:
  1. Grund, Christian & Walter, Tanja, 2013. "Management Compensation and the Economic Crisis: Longitudinal Evidence from the German Chemical Sector," IZA Discussion Papers 7435, Institute for the Study of Labor (IZA).
  2. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 412, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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