Faculty of Economics and Business Administration Publications Database

The firm as the locus of social comparisons: Standard promotion practices versus up-or-out

Auriol, Emmanuelle
von Bieberstein, Frauke
Volume: 121
Pages: 41 - 59
Month: January
ISSN-Print: 0167-2681
Link External Source: Online Version
Year: 2016
Keywords: Status; Promotion hierarchies; Incentives; Sorting

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) standard promotion practices, where 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, standard promotion practices are optimal provided the payoffs associated with success are moderate. Otherwise, up-or-out is, again, optimal.