Working Paper: CEPR ID: DP17235
Authors: Marco Pagano; Luca Picariello
Abstract: Firms may pursue non-meritocratic promotion policies, even though this undermines their performance, if entrepreneurs obtain private benefits from favoritism. Hence, better corporate governance standards favor meritocratic promotions, which in turn encourage workers' skill acquisition. The pay rise upon promotion has ambiguous effects on workers' skill acquisition: while it fosters the supply of skilled labor, it also reduces firms' incentive to promote skilled workers to managerial positions. Social welfare increases with the share of meritocratic firms, but not necessarily with governance standards: small reforms generate losers and gainers, and may on balance lower welfare, while large enough reforms generate Pareto improvements.
Keywords: Corporate Governance; Careers; Favoritism; Merit; Job Selection; Skill Development
JEL Codes: D21; D23; M50; M51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher quality corporate governance (G38) | decreases likelihood of favoritism in promotions (M51) |
| higher quality corporate governance (G38) | increases fraction of meritocratic firms (L25) |
| increases fraction of meritocratic firms (L25) | higher aggregate productivity (O49) |
| higher quality corporate governance (G38) | higher aggregate productivity (O49) |
| labor market competition (J29) | ambiguous effect on skill acquisition (C92) |