Research In Progress

"The Signaling Value of Promotion and Delegation: The Role of Commitment"
Abstract: An informed principal inefficiently refrains from promoting workers to avoid paying the market premium that results from revealing information about workers’ abilities. I show that the principal may prefer to use burdensome entry jobs and up-or-out rules in order to credibly commit to promote workers more often, although such commitments are costly per se. In the same spirit, the principal inefficiently refrains from delegating projects for which the value depends on the ability of the person in charge. The principal hoards responsibility to avoid revealing information about the agent’s ability relative to his own ability. This inefficiency increases if the skill sets of the principal and the agent are more complementary or if the firm is organized as an internal market. As with promotion, the principal would like to commit to delegate more often. Principals who are burdened with many other tasks, who have less reputational concerns or who show great confidence in their subordinates, may delegate more efficiently.