The Firm as the Locus of Social Comparisons: Internal Labor Markets Versus Up-or-Out

45 Pages Posted: 1 Mar 2012

See all articles by Emmanuelle Auriol

Emmanuelle Auriol

University of Toulouse 1 - Toulouse School of Economics (TSE); University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE); CESifo (Center for Economic Studies and Ifo Institute)

Guido Friebel

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Frauke Lammers

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

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) internal labor markets, in which 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, an internal labor market is optimal provided the payoffs associated with success are moderate. Otherwise, up-or-out is, again, optimal. These results are in line with observations from academia, law firms, investment banks and top consulting firms. Here, up-or-out dominates, while internal labor markets dominate where work is less demanding or payoffs are more compressed, for instance, because the environment is less competitive. We present some supporting evidence from academia, comparing US with French economics departments.

Keywords: Incentives, Promotion hierarchies, Sorting, Status

JEL Classification: J3, L2, M5

Suggested Citation

Auriol, Emmanuelle and Friebel, Guido and Lammers, Frauke, The Firm as the Locus of Social Comparisons: Internal Labor Markets Versus Up-or-Out (February 2012). CEPR Discussion Paper No. DP8831, Available at SSRN: https://ssrn.com/abstract=2013822

Emmanuelle Auriol (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

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University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guido Friebel

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Frauke Lammers

affiliation not provided to SSRN ( email )

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