AbstractsLaw & Legal Studies

My dissertation consists of two main parts. In the first part, I present my experimental study in which I examine the effects of providing workers with relative performance information (RPI) on employers’ promotion decisions and the impact of those decisions on worker performance. In my experimental setting, the job after promotion requires higher-level abilities than the current job. I find that workers increase their effort to improve their current job performance after a promotion opportunity is announced because they expect this to increase their chances of promotion even though the new task requires higher-level abilities. Moreover, because employers anticipate that workers who have RPI will react negatively if they see that the best current job performer is not promoted, employers promote the best current job performer rather than the worker best suited for the next job more often when workers have RPI than when they do not. Finally, consistent with the Peter Principle, I find that the promoted worker’s performance after promotion is lower when workers have RPI than when they do not because the promoted worker lacks the ability to perform the new job well. My results suggest that providing workers with RPI can have a downside that offsets the benefits documented in previous studies. In the second part of my dissertation, I discuss how three common firm practices could potentially help firms mitigate the sorting problem I identified in my experimental study. Specifically, I discuss how the communication of the promotion criteria, group incentive plans, and subjective performance evaluation could help employers improve the sorting of workers through promotions. However, while each approach has advantages, each also has drawbacks. It appears that there is no promotion-based incentive system that provides optimal effort incentives to workers while simultaneously achieving the best match between workers and their jobs. This conflict between the incentive and sorting roles of promotion is difficult to resolve and firms must ultimately trade-off between them.