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Standard Promotion Practices Versus Up-Or-Out Contracts

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  • Suman Ghosh

    () (Department of Economics, College of Business, Florida Atlantic University)

  • Michael Waldman

    () (Johnson Graduate School of Management, Cornell University)

Abstract

In most firms a worker in any period is either promoted, left in the same job, or fired (demotions are typically rare), and there is no specific date by which a promotion needs to occur. In other employment situations, however, up-or-out contracts are common, i.e., if a worker is not promoted by a certain date the worker must leave the firm. This paper develops a theory that explains why and when each of these practices is employed. Our theory is based on asymmetric learning in labor markets and incentives associated with the prospect of future promotion. Our main result is that firms employ up-orout contracts when firm-specific human capital is low while they employ standard promotion practices when it is high. We also find that, if firms can commit to a wage floor for promoted workers and effort provision is important, then up-or-out contracts are employed when low-level and high-level jobs are similar. We believe these results are of interest because they are consistent with many of the settings in which up-or-out is typically observed such as law firms and academic institutions.

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Bibliographic Info

Paper provided by Department of Economics, College of Business, Florida Atlantic University in its series Working Papers with number 06007.

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Length: 43 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:fal:wpaper:06007

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Cited by:
  1. Jan Zabojnik, 2008. "Promotion Tournaments in Market Equilibrium," Working Papers 1193, Queen's University, Department of Economics.
  2. Gürtler, Marc & Gürtler, Oliver, 2013. "The optimality of heterogeneous tournaments," Working Papers IF42V1, Technische Universität Braunschweig, Institute of Finance.
  3. Waldman, Michael, 2007. "Theory and evidence in internal labor markets," MPRA Paper 5113, University Library of Munich, Germany.
  4. Alessandro Bonatti & Johannes Horner, 2012. "Career Concerns with Coarse Information," Levine's Working Paper Archive 786969000000000342, David K. Levine.
  5. Lehmann, Jee-Yeon, 2011. "Job assignment and promotion under statistical discrimination: evidence from the early careers of lawyers," MPRA Paper 33466, University Library of Munich, Germany.
  6. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report 475, Federal Reserve Bank of Minneapolis.
  7. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
  8. Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2011. "Optimal Coexistence of Long-term and Short-term contracts in Labor Markets," UFAE and IAE Working Papers 872.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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