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The Firm as the Locus of Social Comparisons: Internal Labor Markets versus Up-or-out

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  • Auriol, Emmanuelle
  • Friebel, Guido
  • Lammers, Frauke

Abstract

We suggest a parsimonious dynamic agency model in which workers have status concerns. A firm is a promotion hierarchy in which a worker’s status depends on past performance. We investigate the optimality of two types of promotion hierarchies: (i) internal labor markets, in which agents have a job guarantee, and (ii) 'up-or-out', in which agents are fired when unsuccessful. We show that up-or-out is optimal if success is difficult to achieve. When success is less hard to achieve, an internal labor market is optimal provided the payoffs associated with success are moderate. Otherwise, up-or-out is, again, optimal. These results are in line with observations from academia, law firms, investment banks and top consulting firms. Here, up-or-out dominates, while internal labor markets dominate where work is less demanding or payoffs are more compressed, for instance, because the environment is less competitive. We present some supporting evidence from academia, comparing US with French economics departments.

Suggested Citation

  • Auriol, Emmanuelle & Friebel, Guido & Lammers, Frauke, 2012. "The Firm as the Locus of Social Comparisons: Internal Labor Markets versus Up-or-out," CEPR Discussion Papers 8831, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8831
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    Cited by:

    1. Bosquet, Clément & Combes, Pierre-Philippe, 2017. "Sorting and agglomeration economies in French economics departments," Journal of Urban Economics, Elsevier, vol. 101(C), pages 27-44.
    2. Bosquet, Clément & Combes, Pierre-Philippe, 2017. "Sorting and agglomeration economies in French economics departments," Journal of Urban Economics, Elsevier, vol. 101(C), pages 27-44.
    3. Tim Friehe & Mario Mechtel & Markus Pannenberg, 2014. "Positional Income Concerns: Prevalence and Relationship with Personality and Economic Preferences," IAAEU Discussion Papers 201411, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    4. Clément Bosquet & Pierre-Philippe Combes, 2013. "Do Large Departments Make Academics More Productive? Agglomeration and Peer Effects in Research," SERC Discussion Papers 0133, Spatial Economics Research Centre, LSE.

    More about this item

    Keywords

    Incentives; Promotion hierarchies; Sorting; Status;

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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