The dynamics of promotions, quits and layoffs

Which manager should a firm promote to CEO? How do the attributes of a managerial workforce affect firms ’ placement decisions and wage offers, and managers ’ quit decisions? The existing literature offers trivial answers to this nuanced question. In one class of models, place-ment decisions are determined on an individual-by-individual basis, so that promotion of one worker does not crowd out another. In the other class — rank order tournaments — the answer is simply the manager who is believed to be most able. The real world is far more compli-cated, as the firm-wide distribution of all managerial attributes — including ability, age and complementarities — enters the placement/wage decisions by firms and the quit decisions by managers. This paper develops a rich dynamic model to get at these issues. Our OLG model features two division managers and a CEO, where each executive may be at a different point in his employment horizon. Taking into account the attributes of all executives, the firm decides which manager to promote to CEO, which manager(s) to lay off, and what wage offers to make to different executives; while managers who were not laid off decide whether to stay at the fir