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Promotion Rules and Skill Acquisition: An Experimental Study

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  • HESSEL OOSTERBEEK
  • RANDOLPH SLOOF
  • JOEP SONNEMANS

Abstract

Standard economic theory identifies a trade‐off between up‐or‐stay and up‐or‐out promotion rules. Up‐or‐stay never wastes the skills of those not promoted but may provide insufficient incentives to invest in skills. Up‐or‐out can always induce investment in skill acquisition but may waste the skills of those not promoted. The paper reports an experiment designed to study this trade‐off. Under up‐or‐out, parties behave almost exactly as theory predicts. But under up‐or‐stay (and stay‐or‐stay), results differ markedly from theoretical predictions. In that case workers invest rather frequently, although the prediction is that they would not. These deviations can be explained by various reciprocity mechanisms.

Suggested Citation

  • Hessel Oosterbeek & Randolph Sloof & Joep Sonnemans, 2007. "Promotion Rules and Skill Acquisition: An Experimental Study," Economica, London School of Economics and Political Science, vol. 74(294), pages 259-297, May.
  • Handle: RePEc:bla:econom:v:74:y:2007:i:294:p:259-297
    DOI: 10.1111/j.1468-0335.2006.00537.x
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    References listed on IDEAS

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    1. Philip A. Haile & Ali Hortaçsu & Grigory Kosenok, 2008. "On the Empirical Content of Quantal Response Equilibrium," American Economic Review, American Economic Association, vol. 98(1), pages 180-200, March.
    2. Ernst Fehr & Klaus Schmidt, 2004. "Contracts, Fairness and Incentives," Levine's Bibliography 122247000000000148, UCLA Department of Economics.
    3. Cox, James C. & Friedman, Daniel & Gjerstad, Steven, 2007. "A tractable model of reciprocity and fairness," Games and Economic Behavior, Elsevier, vol. 59(1), pages 17-45, April.
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    Cited by:

    1. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    2. Randolph Sloof & Hessel Oosterbeek & Joep Sonnemans, 2007. "Does Making Specific Investments Unobservable Boost Investment Incentives?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 911-942, December.
    3. Russo, Giovanni & Van Houten, Gijs, 2021. "Complex Job Design and Layers of Hierarchy," IZA Discussion Papers 14455, Institute of Labor Economics (IZA).
    4. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    5. Dilger, Alexander, 2021. "Die Up-or-out-Regel," Discussion Papers of the Institute for Organisational Economics 6/2021, University of Münster, Institute for Organisational Economics.

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