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The signaling role of promotions: Further theory and empirical evidence

  • DeVaro, Jed
  • Waldman, Michael

An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium sized firm in the financial services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1550.

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Date of creation: Dec 2006
Date of revision:
Handle: RePEc:pra:mprapa:1550
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  1. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.
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  3. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
  4. Ishida, Junichiro, 2004. "Signaling and strategically delayed promotion," Labour Economics, Elsevier, vol. 11(6), pages 687-700, December.
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  10. Tom Coupé & Valérie Smeets & Frédéric Warzynski, 2006. "Incentives, Sorting and Productivity along the Career: Evidence from a Sample of Top Economists," Journal of Law, Economics and Organization, Oxford University Press, vol. 22(1), pages 137-167, April.
  11. DeVaro, Jed, 2008. "The labor market effects of employer recruitment choice," European Economic Review, Elsevier, vol. 52(2), pages 283-314, February.
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  13. Ricart i Costa, Joan E, 1988. "Managerial Task Assignment and Promotions," Econometrica, Econometric Society, vol. 56(2), pages 449-66, March.
  14. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
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  17. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
  18. Heywood, John S., 1994. "How widespread are sheepskin returns to education in the U.S.?," Economics of Education Review, Elsevier, vol. 13(3), pages 227-234, September.
  19. Margaret A. Meyer, 1992. "Biased Contests and Moral Hazard: Implications for Career Profiles," Annals of Economics and Statistics, GENES, issue 25-26, pages 165-187.
  20. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
  21. Steffen Habermalz, 2006. "More Detail on the Pattern of Returns to Educational Signals," Southern Economic Journal, Southern Economic Association, vol. 73(1), pages 125–135, July.
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  23. Layard, Richard & Psacharopoulos, George, 1974. "The Screening Hypothesis and the Returns to Education," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 985-98, Sept./Oct.
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  25. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
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  27. MacLeod, W Bentley & Malcomson, James M, 1988. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 832-54, August.
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  29. repec:ebl:ecbull:v:10:y:2004:i:8:p:1-8 is not listed on IDEAS
  30. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
  31. Hungerford, Thomas & Solon, Gary, 1987. "Sheepskin Effects in the Returns to Education," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 175-77, February.
  32. 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.
  33. Denise J. Doiron, 1995. "Lay-Offs as Signals: The Canadian Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 899-913, November.
  34. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
  35. Joshua C. Pinkston, 2006. "A Model of Asymmetric Employer Learning With Testable Implications," Working Papers 390, U.S. Bureau of Labor Statistics.
  36. Junichiro Ishida, 2004. "Education as advertisement," Economics Bulletin, AccessEcon, vol. 10(8), pages 1-8.
  37. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  38. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  39. Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning and Statistical Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 313-350.
  40. Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1007-1047.
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