Internal Promotion Competitions in Firms

Using a sample of skilled workers from a cross section of establishments in four metropolitan areas of the U.S., I present evidence suggesting that relative performance of workers determines promotions, supporting the notion of internal promotion competitions in which internal hiring policies and fixed job slots combine to create competitions among workers of a given rank in a firm. I then estimate a structural model of promotion tournaments (treating worker performance, the wage spread from promotion, and promotions as endogenous variables) that simultaneously accounts for worker and firm behavior and how the interaction of these behaviors gives rise to promotions. The results are consistent with the predictions of tournament theory that employers optimally set wage spreads to induce higher levels of performance, and that workers are motivated by larger spreads.