Abstract
This paper develops a model of corporate hierarchy in which workers accumulate heterogenous human capital suitable for different positions within the hierarchy. We introduce a key parameter representing the degree of substitutability between different types of human capital. We then demonstrate that the optimal promotion policy, earnings growth, and span of control are all critically dependent upon this key parameter. This dependence gives rise to two types of firms (one with a large and the other with a small value of the substitution parameter) such that the contrast between the two fits surprisingly well into the empirical typology of the internal and occupational labor markets.J. Japan. Int. Econ., September 1997,11(3), pp. 347–384. Institute of Economic Research, Kyoto University, Yoshida-Honmachı̄, Sakyo-ku, Kyoto 606-01, Japan.
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