Rat Races and Glass Ceilings

In an ongoing organization, such as a large law partnership firm, employees are motivated not only by current rewards but also by the prospect of promotion, and the opportunity to make the rules in the future. This leads to a recursive contract design problem in an overlapping generations environment, where current agents may become future principals. The principal offers, and promotion-motivated agents accept, harsh rat race contracts with low wages and high effort levels. Hiring and promotion probabilities emerge as the preferred instrument to screen high cost workers, who face employment barriers and a glass ceiling.