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Promotion Tournaments and Individual Performance Pay

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  • Anja Schöttner
  • Veikko Thiele

Abstract

We analyze the optimal combination of promotion tournaments and individual performance pay in an employment relationship. An agent's effort is non-observable and he has private information about his suitability for promotion. We find that the principal does not provide individual incentives if it is sufficiently important to promote the most suitable candidate. Thus, we give a possible explanation for why individual performance schemes are less often observed in practice than predicted by theory. Furthermore, optimally trading off incentive and selection issues causes a form of the Peter Principle: The less suitable agent has an inefficiently high probability of promotion.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2007-045.

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Length: 31 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2007-045

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Related research

Keywords: Promotion Tournaments; Piece Rates; Hidden Characteristics; Hidden Action;

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Cited by:
  1. Benoît Mahy & François Rycx & Mélanie Volral, 2011. "Does Wage Dispersion Make All Firms Productive?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 455-489, 09.
  2. repec:dul:wpaper:2013/89489 is not listed on IDEAS
  3. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.

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