Hiding Lemons among Peaches: Optimal Retention and Promotion Policy Design

Abstract

How should an employer design its retention and promotion policy when personnel decisions reveal private information about its workers to the labour market? We show it is always optimal to over-retain workers—inefficiently retaining workers who would be more productive elsewhere—to dampen the signalling effect of retention. In contrast, the optimal policy may over- or under-promote workers depending on the production technologies of competing firms. Our results shed light on the role of job titles and the Peter Principle. To solve for the optimal policy, we develop an approach to characterise a sender’s commitment payoff in signalling games.