Internal labor markets and worker rents

Matthias Kräkel and Anja Schöttner

Journal of Economic Behavior & Organization, 2012, vol. 84, issue 2, 491-509

Abstract: We show that establishing an internal labor market by offering combined contracts across hierarchy levels strictly dominates external recruitment when workers are homogeneous. The reason is that only an internal labor market can exploit higher tier rents for incentive provision on lower tiers. Given unobservable heterogeneity of workers, relying on an internal labor market has the further advantage of improving the selection of high ability workers for higher ranks, which is complemented by rent-based incentive schemes. However, observable worker heterogeneity gives rise to a trade-off between incentive and selection issues and may lead to ports of entry on higher tiers of the hierarchy.

Keywords: Bonuses; Internal labor market; Job promotion; Limited liability; Tournaments (search for similar items in EconPapers)
JEL-codes: J33 J41 M5 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268112001606
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:84:y:2012:i:2:p:491-509

DOI: 10.1016/j.jebo.2012.08.008

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().