I analyze the use of promotions as an incentive and screening device in professional partnerships. Partners make production decisions and share in profits. Incentives are modeled as a multi-agent tournament. Associates provide effort to the firm by competing for promotions. Promotions also screen associates by selecting the most skilled to be partners. Either or both of these aspects of promotions lead to endogenous long run growth of firms. Competition to hire associates leads firms to offer equal expected utility to incoming workers. This constraint is estimated using cross-sectional data on major U.S. law firms. Tournament effects explain the data significantly better than a pure screening model. A uniform distribution of underlying skill is chosen by the data. In this case incentives alone cannot generate interior solutions for a firm's growth rate. Screening and incentives jointly explain firm growth and inter-firm variation in compensation.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
808.
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