The Signaling Role of Promotions: Further Theory and Empirical Evidence

Abstract

Abstract[Excerpt] An extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internallabor-market history of a medium-sized firm in the financial-services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal. ABSTRACTAn extensive theoretical literature has developed that investigates the role of promotions as a signal of worker ability. There have been no tests, however, of the empirical validity of this idea. In this paper we develop the theory in a manner that allows us to generate testable predictions, and then investigate the validity of these predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium-sized firm in the financial-services industry. Our results support the notion that signaling is both a statistically significant and economically significant factor in promotion decisions. The paper also contributes to the extensive literature on the role of education as a labor-market signal.

13. Theory and Evidence in Internal Labor Markets

“…Specifically, both Abraham (1980,1981) and DeVaro and Waldman (2006) find that performance evaluations are positively related to future promotions and the size of future wage increases. As will be discussed in more detail later, DeVaro and Waldman consider how a worker's schooling level affects the relationship between performance evaluations and promotion probabilities.…”

Internal Labor Markets in Equilibrium

“…There is an extensive literature studying promotions as signals. See, for example, Waldman (1984), Zábojník and Bernhardt (2001) and DeVaro and Waldman (2012). While analyzing the organization of promotion practices when promotions act as signals would be interesting, it is beyond the scope of this paper.…”

Interim Performance Feedback in Multistage Tournaments: The Optimality of Partial Disclosure

“…We assume that in case of a tie, each worker is equally likely to be promoted. 7 In addition, the …rm can o¤er lump-sum wages W A and W B to workers A and B at the beginning of the game. We assume that the workers are liquidity constrained, i.e., W i 0, for i = A; B.…”

“…Also see Section 5 for further discussion on the robustness of our …ndings to alternative reward structures. 7 We consider alternative tie-breaking rules in Section 5. 8 One way to interpret this formulation of the …rm's payo¤ is to assume that the …rm's pro…t is deterministically governed by the level of e¤ort put in by the two workers, and the outcome of each stage fs; f g is a signal of the workers'e¤ort and does not a¤ect the …rm's bottom line by itself.…”