Promotion Rules and Skill Acquisition: An Experimental Study

30 Pages Posted: 11 Jan 2000

See all articles by Hessel Oosterbeek

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1999

Abstract

When workers' investments in firm-specific skills are non-contractible underinvestment may occur because of holdup. Up-or-out contracts can potentially solve this problem by limiting the firm's scope for opportunistic behavior. The downside of such contracts is that a worker who does not make the grade is dismissed even if his social value within the firm exceeds his social value outside the firm. Promise of promotion contracts, on the other hand, never result in inefficient separations. But with such contracts it might be impossible to provide the proper incentives to invest. In many circumstances the choice between these two types of contract represents the trade-off between efficient investment and efficient job assignment.

This paper reports about an experiment designed to study this trade-off in practice. Results show some remarkable differences with theoretical predictions. Under up-or-out contracts workers are not always dismissed although it is in the firm's best interest to do so. Under promise of promotion contracts workers invest rather frequently although the subgame perfect prediction is that they should not do so. Deviations from theoretical predictions can be explained by reference to different reciprocity mechanisms. In case of the promise of promotion contracts, reciprocity supports the realization of a social surplus which exceeds the social surplus predicted by subgame perfectness. As a result the ordering of different contracts in terms of efficiency is reversed. More generally, this implies that contracts which put some amount of trust in others may perform better than game theory predicts.

JEL Classification: J41, J24, J31, C91

Suggested Citation

Oosterbeek, Hessel and Sloof, Randolph and Sonnemans, Joep, Promotion Rules and Skill Acquisition: An Experimental Study (September 1999). Available at SSRN: https://ssrn.com/abstract=186268 or http://dx.doi.org/10.2139/ssrn.186268

Hessel Oosterbeek (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Amsterdam
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HOME PAGE: http://www.fee.uva.nl/scholar/oosterbeek/

Tinbergen Institute Amsterdam (TIA)

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Institute for the Study of Labor (IZA)

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Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 5241 (Phone)
+31 20 525 4310 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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