Promotions, Adverse Selection, and Efficiency

Michael Waldman and Zhenda Yin

Journal of Labor Economics, 2025, vol. 43, issue 1, 121 - 159

Abstract: We consider how adverse selection affects the efficiency of turnover and postturnover job assignments. In the model, when a high-ability worker is not promoted at the worker’s current employer because of a lack of available managerial openings, it is efficient for the worker to move to a firm seeking a high-ability worker to promote. But this type of turnover does not occur given asymmetric information and adverse selection. We show that up-or-out contracts can be an efficient response to this inefficiency, where our analysis matches several observations concerning real-world promotion decisions and practices related to up-or-out.

Date: 2025
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