Self-Promoting Investments

If a worker's output is observed by the market only when the worker invests in self-promoting activities, then workers overinvest in self-promotion. The efficient contract is one in which firms (i) offer to match outside offers strategically and (ii) guarantee a minimum wage. The model predicts that, in the spot market and under the efficient contract, wage declines with seniority even when conditioning on high ability. This prediction is consistent with the stylized fact regarding the decline of wages with seniority in academia. The model can also explain how the seniority wage premium may vary across disciplines, time, and schools.