Takuma Habu, University of Chicago (Job Market Seminar)

"Hiding Lemons among Peaches: Optimal Retention and Promotion Policy Design"

Abstract

How should an employer design its retention and promotion policy when there is competition for its employees? In an environment where the incumbent employer learns more about its workers than other potential employers, we show that the incumbent’s optimal policy always over-retains workers—retaining workers that it would have let go if all employers had learnt about workers symmetrically—to dampen the positive signalling effect of retention. In contrast, the optimal policy may over- or under-promote workers. The incumbent’s incentive to distort its policy is driven by the technologies of competing firms in the labour market. We demonstrate the extent to which the firm can implement the optimal policy without the ability to commit and study the incentive for the firm to manipulate the signalling effect via designing jobs. Our results shed light on the role of (possibly vacuous) job titles and provide a novel rationale for the Peter Principle.

Contact person: Peter Norman Sørensen