Promote Internally or Hire Externally? The Role of Gift Exchange and Performance Measurement Precision

Abstract

Managers often face the choice between promoting an internal employee and hiring an external candidate. Using an interactive experiment, we examine the drivers of managers' promote/hire decisions and internal employees' behavior before and after those decisions. Consistent with gift exchange theory, we find that employees exert costly effort to increase the chance of being promoted, and they raise their effort level as the promote/hire decision becomes imminent. Managers respond by promoting those who exert high effort, despite employees' inferior ability compared to external candidates.

Navigating through the noise: The effect of color‐coded performance feedback on decision‐making

“…Feedback noise is operationalized by informing participants that profit is not only affected by their allocation but also by external factors over which they have no control, “such as the state of the economy or actions of competitors.” To quantify the noise factor, we draw a random number from a uniform distribution with mean zero, and add this to the result realized by the allocation decision (Callahan et al, 2006; Chan et al, 2023; Choi et al, 2020). The noise factor is independently determined for each participant in each period.…”