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Standard promotion practices versus up‐or‐out contracts
Author(s) -
Ghosh Suman,
Waldman Michael
Publication year - 2010
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2010.00101.x
Subject(s) - promotion (chess) , business , economics , political science , law , politics
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.