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Abstract

This article explores the consequences of sabotage for the design of incentive contracts. The possibility of sabotage gives rise to a dynamic concern, similar to the Ratchet effect, which distorts the agents’ incentives. We first show that the mere possibility of sabotage may make it impossible to implement the first-best effort, and we then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The present model offers a mechanism through which these two schemes arise in a unified framework.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/664945
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File URL: http://www.jstor.org/stable/full/10.1086/664945
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 30 (2012)
Issue (Month): 3 ()
Pages: 627 - 655

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Handle: RePEc:ucp:jlabec:doi:10.1086/664945

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Web page: http://www.journals.uchicago.edu/JOLE/

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References

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1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
   
   • Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
2. Junichiro Ishida, 2006. "Optimal Promotion Policies with the Looking-Glass Effect," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 857-878, October.
3. Hodaka Morita, 2005. "Multi-skilling, Delegation and Continuous Process Improvement: A Comparative Analysis of US-Japanese Work Organizations," Economica, London School of Economics and Political Science, vol. 72(285), pages 69-93, 02.
   
   • Hodaka Morita, 2002. "Multiskilling, Delegation, and Continuous Process Improvement: A Comparative Analysis of U.S.-Japanese Work Organizations," Labor and Demography 0207004, EconWPA.
4. Kong-Pin Chen, 2004. "External Recruitment as an incentive Device," Econometric Society 2004 North American Summer Meetings 54, Econometric Society.
   
   • Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
   • Kong-Pin Chen, 2004. "External Recruitment as an Incentive Device," Econometric Society 2004 Far Eastern Meetings 514, Econometric Society.
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    • Bentley MacLeod & James M. Malcomson, 1985. "Reputation and Hierarchy in Dynamic Models of Employment," Working Papers 628, Queen's University, Department of Economics.
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12. Michael Waldman, 1983. "Job Assignments, Signalling nad Efficiency," UCLA Economics Working Papers 286, UCLA Department of Economics.
    
    • Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
13. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
14. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
15. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
16. Ariga,Kenn & Brunello,Giorgio & Ohkusa,Yasushi, 2010. "Internal Labour Markets in Japan," Cambridge Books, Cambridge University Press, number 9780521142748.
    
    • Ariga,Kenn & Brunello,Giorgio & Ohkusa,Yasushi, 2000. "Internal Labour Markets in Japan," Cambridge Books, Cambridge University Press, number 9780521642408.
17. Margaret A. MEYER, 1992. "Biased Contests and Moral Hazard: Implications for Career Profiles," Annales d'Economie et de Statistique, ENSAE, issue 25-26, pages 165-187.
    
    • Meyer, Margaret A, 1992. "Biased Contests and Moral Hazard: Implications for Career Profiles," CEPR Discussion Papers 637, C.E.P.R. Discussion Papers.
18. Ishida, Junichiro, 2004. "Signaling and strategically delayed promotion," Labour Economics, Elsevier, vol. 11(6), pages 687-700, December.
19. Ishiguro, Shingo, 2004. "Collusion and discrimination in organizations," Journal of Economic Theory, Elsevier, vol. 116(2), pages 357-369, June.
20. Bernhardt, Dan, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 315-39, April.

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Cited by:

1. Gürtler, Oliver & Münster, Johannes, 2010. "Sabotage in dynamic tournaments," Journal of Mathematical Economics, Elsevier, vol. 46(2), pages 179-190, March.
   
   • Gürtler, Oliver & Münster, Johannes, 2009. "Sabotage in dynamic tournaments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 266, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
   • Gürtler, Oliver & Münster, Johannes, 2009. "Sabotage in dynamic tournaments," Discussion Papers, Research Unit: Market Processes and Governance SP II 2009-06, Social Science Research Center Berlin (WZB).
2. Junichiro Ishida, 2012. "Promotion without Commitment: Signaling, Time Inconsistency and Decentralization of the Firm," ISER Discussion Paper 0843, Institute of Social and Economic Research, Osaka University.

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