Osaka Workshop on Economics of Institutions and Organization (#147)

We provide a new model to describe an internal promotion race with power shifting over time. This model includes a kind of rachet effect in which an employee tries to manipulate their post-promotion reputation as a manager before she is promoted. Anticipating this incentive, the belief about the job’s difficulty, which is updating over time, and potential subordinates’ cooperation determine the magnitude of this rachet effect and the internal promotion rule. We use this dynamic model to compare internal promotion and external recruitment. We show that regardless of the rachet effect’s significant impact, committing to internal promotion can provide more long-run profit than the mixture of internal promotion and external recruitment. Abstract：Kohei Yamagata