Strategic promotion and compensation

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)315-339
Number of pages25
JournalReview of Economic Studies
Volume62
Issue number2
DOIs
StatePublished - Apr 1995
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics

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