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

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) standard promotion practices, where agents have a job guarantee, and (ii) "up-orout", 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.

Gender matters - Performance spillover effects of symbolic recognition at school

“…In contrast, in a real-effort lab experiment Neckermann and Yang (2017) find that relative rank information is the driver behind positive ex post effects of unannounced financial or symbolic recognition. Within firms, symbolic recognition including relative rank information is often inferred from the position of an employee in the firm's hierarchy (Auriol et al, 2016). This important effect of gender is also documented in the literature examining preferences for competition.…”

How to Sell Jobs

“…Alternatively, we can think of this problem as one of finding the optimal way to sell desirable job attributes to potential employees. 2 We show that the optimal way to sell highly desirable jobs is by creating new low-quality jobs that serve as a port of entry to the firm. In an optimal contract, firms first assign all young workers to low-quality jobs and then promote only a subset of them to high-quality jobs, as in up-or-out contracts.…”

“…Ghosh and Waldman (2010)). 3 Another reason why up-or-out contracts can be optimal is that they provide steeper incentives than standard promotion practices (Auriol, Friebel, and von Bieberstein, 2016). The second group of theories is based on selection issues.…”

Prestige, Promotion, and Pay

“…The economic literature on status typically assumes that the value of an extra dollar (or consumption) is higher for those with higher status. This assumption is made by Hopkins and Kornienko (2004), Becker, Murphy, and Werning (2005), Auriol and Renault (2008), Ray and Robson (2012), and Auriol, Friebel, and von Bieberstein (2016), among others. 8 Becker, Murphy, and Werning (2005) argue that "higher status raises the marginal utility of a given level of income partly because persons with high status often have access to clubs, friends, and other 'goods' that are costly but are not available to those with low status" (p. 284).…”

“…This assumption is made by Hopkins and Kornienko (2004), Becker, Murphy, and Werning (2005), Auriol and Renault (2008), 7 Examples include Murphy, Shleifer, and Vishny (1991), Philippon (2010), Glode, Green and Lowery (2012), Thanassoulis (2012), Strobl and Van Wesep (2013), Bond and Glode (2014), Axelson and Bond (2015), Bolton, Santos, and Scheinkman (2016), Glode and Lowery (2016), Acharya, Pagano, and Volpin (2016), Bénabou and Tirole (2016), Biais and Landier (2020), Waters (2022), andBerk andvan Binsbergen (2022). Ray andRobson (2012), andAuriol, Friebel, andvon Bieberstein (2016), among others. 8 Becker, Murphy, and Werning (2005) argue that "higher status raises the marginal utility of a given level of income partly because persons with high status often have access to clubs, friends, and other "goods" that are costly but are not available to those with low status" (p. 284).…”