Publicizing Performance

Management Science, 2013, Vol. 59 (4), pp. 918-932 (with Edward Van Wesep).

In most employment relationships, the employee's performance at the firm is privately, not publicly, observed. Firms can reward successful employees by publicizing their abilities, for example via a job title, a glowing letter of recommendation, or a resume-worthy award. Firms that establish reputations for hiring young workers and promoting those who succeed lose good workers to competitors, but can pay less to young, inexperienced workers in exchange. We find in a general equilibrium setting that firms with reputations for publicizing performance are able to pay less to employees at every level of tenure and thus earn economic profit, but that these firms will never be the most productive in the economy. In order for such equilibria to exist, the worker-firm match must be important, suggesting that this practice takes place only in human-capital intensive industries.

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