Corporate Governance, Meritocracy and Careers

Abstract Firms may pursue non-meritocratic promotion policies at the cost of lower profitability, if they yield private benefits of control. Corporate governance standards that limit these private benefits favor meritocratic promotions, and thereby encourage workers' skill acquisition. Managerial incentive pay has ambiguous effects on workers' skill acquisition: it fosters the supply of skilled labor, while reducing firms' willingness to promote skilled workers to managerial positions. Social welfare increases with the share of meritocratic firms, but not necessarily with governance standards: small reforms generate losers and gainers, and may on balance lower welfare, while drastic enough reforms can generate Pareto improvements.