Promote Internally or Hire Externally? The Role of Trust, Reciprocity, and Performance Measurement Precision

48 Pages Posted: 23 May 2021

See all articles by Eric W. Chan

Eric W. Chan

University of Texas at Austin - Department of Accounting

Jeremy B. Lill

University of Kansas

Victor S. Maas

University of Amsterdam - Amsterdam Business School

Date Written: May 1, 2021

Abstract

Managers often face the choice between promoting an internal employee and hiring an external candidate. Using an incentivized experiment, we examine managers’ promote/hire decision and employees’ behavior before and after that decision in a setting in which the external candidate has superior ability. Consistent with theory on trust and reciprocity, results indicate that employees invest in costly effort to increase their chances of promotion, and managers reciprocate this effort by promoting them despite their inferior ability. Managers tend to anchor their promote/hire decision on employees’ early effort level rather than their sharp increase in effort immediately prior to that decision. Importantly, we predict and find that managers are more likely to promote internally rather than hire externally under a less precise performance measurement system. Results also suggest that promoted (non-promoted) employees who exerted high effort react more positively (negatively) to their managers’ promote/hire decision under a more precise system.

Keywords: Promotion, Trust, Reciprocity, Performance Measurement

JEL Classification: M40, M51

Suggested Citation

Chan, Eric W. and Lill, Jeremy B. and Maas, Victor S., Promote Internally or Hire Externally? The Role of Trust, Reciprocity, and Performance Measurement Precision (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=3849098 or http://dx.doi.org/10.2139/ssrn.3849098

Eric W. Chan (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

Jeremy B. Lill

University of Kansas ( email )

Department of Accounting
School of Business
Lawrence, KS 66045
United States

Victor S. Maas

University of Amsterdam - Amsterdam Business School ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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