Rat Races and Glass Ceilings: An Analysis of Career Paths in Organizations

Ekaterina Sherstyuk

3:00 - 4:15 PM
December 7, 2001
Social Sciences Building 515

Abstract

In a long lived organization, such as a large law partnership firm, employees are motivated not only by current rewards but also by the prospect of promotion, and the opportunity to influence policy and make the rules in the future. We model career design in such a firm as a recursive mechanism design problem in an overlapping generations environment. The agents differ in their cost of effort. We find that under both complete and incomplete information, a profit-maximizing principal offers, and promotion-motivated agents accept, "rat-race'' contracts with very low wages and high effort levels. With wages driven down to zero, promotions become the main instrument to discriminate among agents in an adverse selection environment. Thus optimal adverse selection contracts introduce a promotion barrier, or a "glass ceiling'', for high cost agents. We also find that information effects can endogenously limit the size of the firm. We apply this framework to gender discrimination in employment.