The Firm as the Locus of Social Comparisons: Internal Labor Markets versus Up-or-Out

Emmanuelle Auriol, Guido Friebel (gfriebel@wiwi.uni-frankfurt.de) and Frauke Lammers (lammers@iop.unibe.ch)
Additional contact information
Frauke Lammers: University of Bern

No 6343, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We suggest a parsimonious dynamic agency model in which workers have status concerns. A firm is a promotion hierarchy in which a worker's status depends on past performance. We investigate the optimality of two types of promotion hierarchies: (i) internal labor markets, in which agents have a job guarantee, and (ii) "up-or-out", in which agents are fired when unsuccessful. We show that up-or-out is optimal if success is difficult to achieve. When success is less hard to achieve, an internal labor market is optimal provided the payoffs associated with success are moderate. Otherwise, up-or-out is, again, optimal. These results are in line with observations from academia, law firms, investment banks and top consulting firms. Here, up-or-out dominates, while internal labor markets dominate where work is less demanding or payoffs are more compressed, for instance, because the environment is less competitive. We present some supporting evidence from academia, comparing US with French economics departments.

Keywords: status; promotion hierarchies; incentives; sorting (search for similar items in EconPapers)
JEL-codes: J3 L2 M5 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2012-02
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-lab and nep-lma
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://docs.iza.org/dp6343.pdf (application/pdf)

Related works:
Working Paper: The Firm as the Locus of Social Comparisons: Internal Labor Markets versus Up-or-out (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp6343

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
library@iza.org

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte (hinte@iza.org).