Standard promotion practices versus up-or-out contracts

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 practic...

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Bibliographic Details
Published in:The Rand journal of economics 2010-06, Vol.41 (2), p.301-325
Main Authors: Ghosh, Suman, Waldman, Michael
Format: Article
Language:English
Subjects:
Academia
Asymmetry
Business practices
Contracts
Employee efficiency
Employee promotions
Employment
Employment contracts
Employment practices
Human capital
Human resources
Labor economics
Labor market
Law firms
Learning
Modeling
Occupational promotion
Productivity
Studies
Wage levels
Wages
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Summary: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.
ISSN:0741-6261
1756-2171
DOI:10.1111/j.1756-2171.2010.00101.x