The Signaling Role of Promotions: Further Theory and Empirical Evidence

[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 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

Antitrust Perspectives for Durable-Goods Markets

Markets for durable goods constitute an important part of the economy. In this paper I first briefly review the microeconomic theory literature on durable-goods markets, focusing mostly on the last ten years. I then discuss a number of my own recent analyses concerning optimal antitrust policy in durable-goods markets that mostly build on ideas in the larger literature. Specific topics covered include: (i) optimal antitrust policy for durable-goods mergers; (ii) practices that eliminate secondhand markets; (iii) tying in markets characterized by upgrades and switching costs; and (iv) antitrust policy for aftermarket monopolization in durable-goods markets.

The Signaling Role of Promotions: Further Theory and Empirical Evidence (CRI 2009-008)

An extensive theoretical literature investigates the role of promotions as a signal of worker ability. In this paper we extend the theory by focusing on how the signaling role of promotion varies with a worker’s education level, and then investigate the resulting 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 signaling being 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

Standard Promotion Practices versus Up-or-Out Contracts (CRI 2009-001)

In most firms a worker in any period is either promoted, left in the same job, or fired (demotions are typically rare), and there is no specific date by which a promotion needs to occur. In other employment situations, however, up-or-out contracts are common, i.e., if a worker is not promoted by a certain date the worker must leave the firm. This paper develops a theory that explains why and when each of these practices is employed. Our theory is based on asymmetric learning in labor markets and incentives associated with the prospect of future promotion. Our main result is that firms employ up-or-out contracts when firm-specific human capital is low while they employ standard promotion practices when it is high. We also find that, if firms can commit to a wage floor for promoted workers and effort provision is important, then up-or-out contracts are employed when low-level and high-level jobs are similar. We believe these results are of interest because they are consistent with many of the settings in which up-or-out is typically observed such as law firms and academic institutions

The signaling role of promotions: Further theory and empirical evidence

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 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.signaling theory; promotions; asymmetric information

Enriching a Theory of Wage and Promotion Dynamics Inside Firms

In previous work we showed that a model that integrates job assignment, human-capital acquisition, and learning can explain several empirical findings concerning wage and promotion dynamics inside firms. In this paper we extend that model in two ways. First, we incorporate schooling into the model and derive a number of testable implications that we then compare with the available empirical evidence. Second, and more important, we show that introducing task-specific' human capital allows us to produce cohort effects (i.e., the finding that a cohort that enters a firm at a low wage will continue to earn below-average wages years later). We argue that task-specific human capital is a realistic concept and may have many important implications. We also discuss limitations of our (extended) approach.

The Index of Leading Economic Indicators as a Source of Expectational Shocks

A recurrent theme in the literature on business cycle fluctuations is the importance of expectational shocks that change the beliefs of agents concerning the future level of aggregate activity, but that do not reflect real movements in the fundamentals. This paper employs the ASA-NBER Survey of Forecasts by Economic Statisticians to measure expectations and investigates whether the errors in the initial announcements of the index of leading economic indicators serve as a source of this type of expectational shock. Our analysis strongly supports the idea that these errors are both a statistically significant and economically significant source of such shocks.Business Cycle; Cycle; Economic Indicator; Fluctuation; Forecast

Competition, Monopoly Maintenance, and Consumer Switching Costs

Significant attention has been paid to why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product. This paper provides an explanation for this practice that is based on consumer switching costs and the choice of consumers between maintaining and replacing used units. In our explanation, if a firm does not monopolize the maintenance market for its own product, then consumers sometimes maintain used units when it would be efficient for the units to be replaced. In turn, the return to monopolizing the maintenance market is that the practice allows the firm to avoid this inefficiency. An interesting aspect of our analysis that has significant public-policy implications is that, in contrast to most previous explanations for why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product, in our explanation the practice increases rather than decreases both social welfare and consumer welfare.durable goods; aftermarkets; switching costs

Optimal copyright length and ex post investment: a Mickey Mouse approach

This paper formally explores the optimal length of copyright protection when the value of an intellectual work changes over time due to depreciation and value-enhancing ex-post investments. The first main finding is that, in the case of a single project, granting infinitely-lived copyright protection maximizes social welfare when the return on ex-post investments is high relative to the return on the initial investment. We also provide simulation results of our model for the case of multiple heterogeneous projects that show how social welfare varies with the length of copyright protection and the returns on initial and ex-post investments. We then consider what our framework says concerning the social-welfare effects of the 1998 Copyright Term Extension Act. Here we show that, depending on the importance of ex-post investments, the act may have either increased or decreased social welfare. Our final analysis considers the social-welfare implications of replacing fixed-length copyright protection with Landes and Posner's (2003) idea of indefinitely-renewable copyright protection. We find that implementing indefinitely-renewable copyright protection frequently increases social welfare provided the returns on ex-post investments are sufficiently large. We also provide a brief history of Disney's Mickey Mouse and argue that the history of that character matches quite well with the predictions of our theoretical approach.Optimal copyright length; copyright term extension act