A firm will typically gather information concerning its own workers that is not available to other potential employers, while other firms will attempt to reduce this information asymmetry by observing the actions of the initial employer. I argue that this process can be important in environments characterized by up-or-out contracts in that the retention decision can serve as a signal of productivity. The article investigates this argument in an environment where up-or-out contracts are employed because they provide workers with an incentive to accumulate general human capital and where learning takes place in a diffuse fashion.

We consider how adverse selection affects the efficiency of turnover and postturnover job assignments. In the model, when a high-ability worker is not promoted at the worker’s current employer because of a lack of available managerial openings, it is efficient for the worker to move to a firm seeking a high-ability worker to promote. But this type of turnover does not occur given asymmetric information and adverse selection. We show that up-or-out contracts can be an efficient response to this inefficiency, where our analysis matches several observations concerning real-world promotion decisions and practices related to up-or-out.

An extensive theoretical literature investigates the role of promotions as a signal of worker ability. We extend the theory by focusing on how the signaling role of promotion varies with education and then investigate the resulting predictions using a longitudinal data set that contains detailed information concerning the internal-labor-market history of a medium-sized firm in the financial services industry. Our results support signaling being important for understanding the differences between promotion practices concerning bachelor’s and master’s degree holders, while the evidence concerning the importance of signaling for high school graduates and PhDs is mixed.

In previous work, we showed that a model that integrates job assignment, human capital acquisition, and learning can explain several empirical findings concerning wage and promotion dynamics inside firms. In this article, we extend that model in two ways. First, we incorporate schooling and derive further testable implications that we then compare with the available empirical evidence. Second, and more important, we show that introducing “task‐specific” human capital allows us to produce cohort effects. We further argue that task‐specific human capital is a realistic concept and may have many important implications. We also discuss limitations of our (extended) approach.

In recent years a large literature has developed that investigates the role of insurance in labor market contracting. Papers in this literature typically assume that workers are completely restricted from borrowing. We argue, and to some extent demonstrate, that in many environments capital market imperfections do not lead to a noborrowing result but rather to a capital market assumption that is intermediate between the no-borrowing assumption and the perfect capital market assumption. We then consider some of the ramifications that this intermediate capital market assumption has on the type of insurance the firms provide through the labor market contract.

In this paper we focus on a classic idea concerning span of control, which is that a prime driver is the scale of operations effect. We extend the theory concerning the scale of operations effect by allowing firms’ beliefs concerning a manager’s ability to evolve over the manager’s career. We empirically investigate the resulting testable predictions using a unique single-firm data set that contains detailed information concerning the reporting relationships at the firm. Our empirical analysis supports the notion that the scale of operations effect and learning are both important determinants of a firm’s span of control.