Ex Ante versus Ex Post Optimal Promotion Rules: The Case of Internal Promotion

A firm deciding on its promotion practices will be concerned both with the efficient assignment of workers to tasks and with rewarding prior performance. This can result in a time-inconsistency problem because the promotion rule that is optimal at the time of the promotion decision may differ from the rule that is optimal before performance is determined. In this article I explore the role of time inconsistency in determining promotion practices. In particular, I show that the common practice of favoring internal candidates for promotion can be understood as a response by firms to the problem of time inconsistency.