Abstract
Standard economic theory identifies a trade-off between up-or-stay and up-or-out promotion rules. Up-or-stay never wastes the skills of those not promoted but may provide insufficient incentives to invest in skills. Up-or-out can always induce investment in skill acquisition but may waste the skills of those not promoted. The paper reports an experiment designed to study this trade-off. Under up-or-out, parties behave almost exactly as theory predicts. But under up-or-stay (and stay-or-stay), results differ markedly from theoretical predictions. In that case workers invest rather frequently, although the prediction is that they would not. These deviations can be explained by various reciprocity mechanisms.
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