Endogenous Effort, Promotion, Retirement and Heterogeneous Ability in a Labor Hierarchy
AIR FORCE INST OF TECH WRIGHT-PATTERSONAFB OH
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This work simultaneously attacks the questions of jointly endogenous effort, retirement, and promotions. Workers endowed with heterogeneous ability are employed within a firms hierarchical promotion structure. Analyzing the situation step by step, worker retirement, consumption and effort decisions are examined first. Using savings, laborers store earnings for future use and eventually choose to retire, continuing to consume earnings from accumulated savings. In retirement, workers avoid disutility from working. Utility of laborers improves discretely upon retirement. Worker consumption tends to be constant over time. Effort during employment is efficient and independent of worker ability. Workers cannot be ordered by ability using observed consumption, effort or retirement Next, the nature of hierarchical firms is examined. When manager decisions affect lower level worker productivity, firms desire higher ability workers as managers. A given worker prefers to work as a manager versus an underling. Firms must devise a promotion system to identify able employees for advancement since workers do not self select. Promotion opportunities automatically create tournament situations. With promotion tournaments, effort is unevenly distributed across worker ability. Workers nearest the promotion cutoff work hardest. Without collusion, smaller promotion contest groups result in higher overall worker effort. Combining the two previous situations, worker effort, consumption and retirement in a promotion hierarchy is examined giving promoted workers residual claimancy on the firm can change the retirement decision, causing inefficiently early retirement. Retirement decisions of higher level workers create externalities for lower level workers, thus affecting firm productivity.
- Personnel Management and Labor Relations