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Standard promotion practices versus up‐or‐out contracts

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  • Suman Ghosh
  • Michael Waldman

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.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:randje:v:41:y:2010:i:2:p:301-325
    DOI: 10.1111/j.1756-2171.2010.00101.x
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    File URL: https://doi.org/10.1111/j.1756-2171.2010.00101.x
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