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Promotions and Training: Do Competitive Firms Set the Bar too High?

Luca Picariello

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Firms use promotions to match workers with jobs that fit their ability, but also to provide incentives to exert on-the-job training effort. As promotions make workers more attractive in the labor market, firms will balance productivity and retention costs. I show that if workers exert firm-specific training effort, profit-maximizing firms that cannot commit to promotion rules promote fewer workers than efficient. Differently, if firms can commit to promotion bars, for instance by means of structured managerial practices, they set the bar efficiently. If workers acquire portable training, this directly increases retention costs. Firms that cannot commit to promotion bars will set them inefficiently high. In this case, workers are discouraged from training when competition for talent is fierce. If firms can commit to promotion bars, they set them lower than without commitment providing strong incentives for workers to acquire portable training. However, in this scenario the promotion bar may be set too low compared with the efficient talent allocation.

Keywords: Promotions; on-the-job training; poaching; career concerns. (search for similar items in EconPapers)
JEL-codes: D86 M51 M52 M53 (search for similar items in EconPapers)
Date: 2019-12-16
New Economics Papers: this item is included in nep-hrm, nep-lma and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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