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Promotion without Commitment: Signaling, Time Inconsistency and Decentralization of the Firm

Listed author(s):
  • Junichiro Ishida

This paper explores the consequences and implications of the "dual role of promotion" in an environment where a firm must simultaneously achieve two distinct goals -- assignment and incentive provision -- via the strategic use of promotions. We argue that the efficient promotion rule is generally not implementable, as it necessarily entails time-inconsistent objectives: the firm is always tempted ex post to promote the worker with the highest upside potential rather than the one with the highest output. This ex post bias towards the assignment role of promotion leads to inefficient task choices where too many workers are induced to work on the difficult task to signal their productivities. The framework identifies the costs and benefits of decentralization, in relation to factors such as the levels of human and social capital, the degree of market competition, firm size, and distance to the technology frontier, and provides predictions that are in line with recent empirical evidence.

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File URL: http://www.iser.osaka-u.ac.jp/library/dp/2012/DP0843.pdf
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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0843.

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Date of creation: May 2012
Handle: RePEc:dpr:wpaper:0843
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  1. James Malcomson & James A. Fairburn, 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 26, University of Oxford, Department of Economics.
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  3. Nick Bloom & John Van Reenen, 2010. "Why do Management Practices Differ Across Firms and Countries?," CEP Occasional Papers 26, Centre for Economic Performance, LSE.
  4. Alonso, Ricardo & Matouschek, Niko, 2005. "Relational Delegation," IZA Discussion Papers 1454, Institute for the Study of Labor (IZA).
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  6. Nick Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does Product Market Competition Lead Firms to Decentralize?," CEP Discussion Papers dp0966, Centre for Economic Performance, LSE.
  7. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1351-1408.
  9. Nick Bloom & Raffaella Sadun & John Van Reenen, 2009. "The organization of firms across countries," LSE Research Online Documents on Economics 25481, London School of Economics and Political Science, LSE Library.
  10. Cuñat, Vicente & Guadalupe, Maria, 2006. "Globalization and the Provision of Incentives Inside the Firm," CEPR Discussion Papers 5950, C.E.P.R. Discussion Papers.
  11. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
  12. Dan Bernhardt, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 315-339.
  13. Nick Bloom & Raffaella Sadun & John Van Reenen, 2010. "Recent advances in the empirics of organizational economics," LSE Research Online Documents on Economics 28721, London School of Economics and Political Science, LSE Library.
  14. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  15. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers.
  16. Nicholas Bloom & Benn Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2013. "Does Management Matter? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 1-51.
  17. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," NBER Working Papers 10501, National Bureau of Economic Research, Inc.
  18. Nicholas Bloom & John Van Reenen, 2010. "Human Resource Management and Productivity," NBER Working Papers 16019, National Bureau of Economic Research, Inc.
  19. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  20. Limor Golan, 2005. "Counteroffers and Efficiency in Labor Markets with Asymmetric Information," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 373-393, April.
  21. Guadalupe, Maria & Wulf, Julie, 2009. "The Flattening Firm and Product Market Competition," CEPR Discussion Papers 7253, C.E.P.R. Discussion Papers.
  22. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
  23. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
  24. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  25. Raghuram Rajan & Julie Wulf, 2003. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," NBER Working Papers 9633, National Bureau of Economic Research, Inc.
  26. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 529-554.
  27. Junichiro Ishida, 2012. "Dynamically Sabotage-Proof Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 30(3), pages 627-655.
  28. Michael Waldman, 2003. "Ex Ante versus Ex Post Optimal Promotion Rules: The Case of Internal Promotion," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 27-41, January.
  29. Hideo Owan, 2004. "Promotion, Turnover, Earnings, and Firm-Sponsored Training," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 955-978, October.
  30. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
  31. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  32. Junichiro Ishida, 2006. "Optimal Promotion Policies with the Looking-Glass Effect," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 857-878, October.
  33. Ricardo Alonso & Niko Matouschek, 2007. "Relational delegation," LSE Research Online Documents on Economics 58668, London School of Economics and Political Science, LSE Library.
  34. Ishida, Junichiro, 2004. "Signaling and strategically delayed promotion," Labour Economics, Elsevier, vol. 11(6), pages 687-700, December.
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