Promotion rules and skill acquisition: An experimental study*

Gibbons (1998) identifies a tradeoff between up-or-stay and up-or-out promotion rules. Upor-stay never wastes skills of those not promoted but may provide insufficient incentives to invest in skills. Up-or-out on the other hand can always induce investment in skill acquisition but may waste the skills of those not promoted. This paper reports about an experiment designed to study this tradeoff. Under the up-orout rule parties behave (almost) just as theory predicts them to do. But under up-or-stay rules results differ markedly from theoretical predictions. Workers invest rather frequently although the subgame perfect prediction is that they should not do so. Deviations from theoretical predictions can be explained by reference to different reciprocity mechanisms. * We gratefully acknowledge valuable comments from participants at seminars in Amsterdam and Groningen and the ESA-meeting in Lake Tahoe. JEL Codes: J41, J24, J31, C91