Promotion Signaling and Human Capital Investments

In a world characterized by asymmetric learning, promotions can serve as signals of worker ability, and this, in turn, can result in inefficient promotion decisions. If the labor market is competitive, the result will be practices that reduce this distortion. We explore how this logic affects human capital investment decisions. We show that, if commitment is possible, investments will be biased toward the accumulation of firm-specific human capital. We also consider what happens when commitment is not possible and show a number of results including that, if investment choices are not publicly observable, choices are frequently efficient.