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2 Model and Econometric Framework

This section summarizes the Gibbons and Waldman model of intra-firm mobility and wage
determination and highlights the model’s main predictions. The model characterizes the re-
lationship between a worker’s career path and the evolution of his wage within a firm. It
integrates wage determination and job assignment in a dynamic context, where the wage pol-
icy of the firm is based on comparative advantage and learning. In other words, it endogenizes
the allocation of workers to job rank as workers are assigned to job ranks that better reward
their productive ability. In addition, it endogenizes mobility between job ranks because, if the
productive ability of a worker is not perfectly observed, both the firm and the worker learn
about it and changes in expected productive ability lead the worker to move to another rank
of the job ladder.

Firms are modelled as consisting of various potential job assignments and, because jobs are
differently sensitive to ability, comparative advantage determines the assignment rule on the
basis of output maximization. Output grows with the workers’ accumulation of human capital
or productive ability each period. In addition, output grows at a different speed depending on
the level of innate ability of the worker. All the workers end up reaching the upper level of the
job ladder but some get there faster than others. When innate ability is not perfectly observed,
learning takes place and wages and mobility within the firm are driven by the evolution of
expected ability.

2.1 Summary of the Model

The model consists of identical firms operating in a competitive environment and producing
output using labor as the only input. All firms consist of a three-level job ladder where jobs
are indexed by
j = 1, 2 or 3. Jobs are defined in advance, independent of the people who fill
them. Both firms and workers are risk-neutral and have a discount rate of zero.

A worker’s career lasts for T periods. Worker i has innate ability, denoted by θi, which can
be either high (
θH) or low (θL). The worker has also effective ability, ηit, defined as the prod-
uct of his innate ability and some function
f of his labor-market experience xit prior to period t:

ηit = θif(xit) with f' > 0 and f'' 0                            (1)

The production technology is such that if worker i is assigned to job j in period t then he



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