Strategic Promotion and Compensation

Dan Bernhardt

The Review of Economic Studies, 1995, vol. 62, issue 2, 315-339

Abstract: Within a hierarchical firm structure, this paper details how the composition of a worker's skills and the non-observability of a worker's ability affect wage and promotion paths. Promotion-based compensation schemes derive naturally from the worker's asymmetrically observed ability. Promotion takes place over time and is inefficient since employers strategically exploit their knowledge of an able worker's ability. Conversely, employers may be unable to efficiently demote and retain bad managers without paying bonuses. Employers are led to promote educated employees before their equally or more able, but uneducated, counterparts. Explanations for fast-track promotions plans, and other empirical regularities are provided.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:62:y:1995:i:2:p:315-339.

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