Knowledge that Transforms

This article considers a model where the agent is uncertain about his innate ability and instead makes an inference from others’ (namely, the principal’s) perception, as often emphasized in the psychology literature. When the principal has superior knowledge about the agent’s productivity than the agent himself, the principal has an incentive to use promotions strategically to boost the agent’s self‐confidence. Within this framework the optimal promotion policy depends not only on the agent’s current expected ability type but also on the history of his previous job assignments. We use this fact to explain why we rarely observe demotions in organizations.

The existence of counteroffers can lead to a variety of important labor‐market features. This article develops a model of the selective use of counteroffers in which a firm decides whether to extend counteroffers after a worker informs the firm of an alternative offer. We outline factors that can influence the employer’s net value of making a counteroffer and, thus, affect the likelihood of a counteroffer. We provide a new empirical analysis that examines whether proxies for these factors do, in fact, influence the likelihood that a firm would consider a counteroffer to an employee with a competing offer.