Up-or-Out Contracts: A Signaling Perspective

A firm will typically gather information concerning its own workers that is not available to other potential employers, while other firms will attempt to reduce this information asymmetry by observing the actions of the initial employer. I argue that this process can be important in environments characterized by up-or-out contracts in that the retention decision can serve as a signal of productivity. The article investigates this argument in an environment where up-or-out contracts are employed because they provide workers with an incentive to accumulate general human capital and where learning takes place in a diffuse fashion.