published in: Research in Labor Economics, 2010, 30,189-231
We formulate an empirical model of promotion with dynamic self-selection where the current
promotion probability depends on the hierarchical level in the firm, individual human capital,
unobserved (to the econometrician) individual specific attributes, time varying firm specific
variables (firm size and profits) as well as endogenous past promotion histories. We examine
the causal effect of previous promotion histories (as measured by realized speed of
promotion) on future promotion outcomes. The model is fit on an 8 year panel of promotion
histories of 30,000 American executives employed in more than 380 different firms. The
stochastic process generating promotions is weakly correlated with standard human capital
endowment variables (age, schooling and tenure). It may be viewed as a series of promotion
probabilities which become smaller as an individual moves up in the hierarchy and is
primarily explained by individual (or firm) specific factors other than measured human capital.
We also find that, conditional on unobservables, the promotion probability is only mildly
enhanced, on average, by the speed of promotion achieved in the past (a structural fast track
effect). However, we find the existence of a relatively high cross-sectional dispersion in the
effect of past promotion histories and we are able to provide an explanation for this relatively
high dispersion. In general, the magnitude of the individual specific effect of achieved speed
of promotion is inversely related to accumulated human capital (schooling and tenure). We
believe that these findings are consistent with the hypothesis that the signaling aspect of past
promotions is stronger for those who are less educated and stronger for those who are
relatively new in a firm. We also find that a negative correlation between current promotion
and past speed of promotion cannot be ruled out for a portion of the population, and we are
able to relate this finding to the “Peter Principle”.
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