Promotions and Human Capital Acquisition: Do Competitive Firms set the Bar too High?

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  • Promotions and Human Capital Acquisition: Do Competitive Firms set the Bar too High?
  • Abstract:
    Firms use promotions for two scopes: to allocate talent across jobs and incentivize workers to accumulate human capital. In this paper I study the impact of promotions on workers’ investments in specific and portable human capital. If firms cannot commit to promotion rules in competitive labor markets, they promote less workers with respect to the Pareto-efficient benchmark to reduce retention costs. In this case, workers may be discouraged from accumulating human capital under certain conditions. If firms can state promotion rules before workers’ investments, they may set them lower than when they are noncontractible. This may lead to equilibria with overpromotion and overinvestment.