Promotion Rules and Skill Acquisition: An Experimental Study

Standard economic theory identifies a trade-off between up-or-stay and up-or-out promotion rules. Up-or-stay never wastes the skills of those not promoted but may provide insufficient incentives to invest in skills. Up-or-out can always induce investment in skill acquisition but may waste the skills of those not promoted. The paper reports an experiment designed to study this trade-off. Under up-or-out, parties behave almost exactly as theory predicts. But under up-or-stay (and stay-or-stay), results differ markedly from theoretical predictions. In that case workers invest rather frequently, although the prediction is that they would not. These deviations can be explained by various reciprocity mechanisms. Copyright (c) The London School of Economics and Political Science 2006.