Managing Careers in Organizations
with Rongzhu Ke and Jin Li
A firm's organizational structure imposes constraints on its ability to use promotion-based incentive systems. The main contribution of this paper is to develop a framework for identifying these constraints and exploring their consequences. We show that firms manage workers' careers by putting in place personnel policies that optimally resemble an internal labor market. Firms may adopt forced-turnover policies in order to keep lines of advancement open. In addition, they may alter their organizational structures to relax these constraints. This gives rise to a trade-off between incentive provision at the worker level and productive efficiency at the firm level. Our framework generates novel testable implications that connect firm-level characteristics with workers' careers in ways that are consistent with a rich set of empirical findings.