A large literature attempts to explain compensation and personnel policies in large organizations. Three features of the U.S. military system—flat rank spreads in pay, a relatively generous pension, and heavy reliance on up‐or‐out promotions—are at variance with common practices in large civilian organizations. This article develops a model of individual decision making in a large, hierarchical organization and uses the model to explain these apparent puzzles. The lack of lateral entry and heterogeneity in entrants’ abilities and preferences for military service play key roles in the observed policies.

Firms often view job applicant referrals from current employees as more informative than direct applications or referrals through formal labor market intermediaries such as placement firms. The authors argue that old boy networks reduce employers' uncertainty about worker productivity. Using Jovanovic's job matching model, they show that workers hired through the old boy network should (1) earn higher initial salaries, (2) experience lower subsequent wage growth on the job, and (3) stay on the job longer than otherwise comparable workers hired from outside the network. They find considerable support for this theory using data from the 1972 Survey of Natural and Social Scientists and Engineers.