Equilibrium Poaching in Labor Markets

Abstract

When firms have to employ a high-ability worker at a managerial position, sometimes they have to poach a promoted worker from another firm without observing that worker’s ability. We discuss the implications of this practice for the promotion signaling framework. Our model shows the turnover of workers and the wages paid at such an economy, and how they depend on the worker’s own ability and the ability of other workers in the firm. We show that due to the winner’s curse, firms make a non-positive expected profit from poaching a worker. In that case, non-promoted workers “subsidize” the wage paid to their manager. The need to hire managers without observing their ability is a new barrier to entry for firms (JEL codes: M51, J31).