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Incentive Hierarchies

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  • Auriol, Emmanuelle
  • Renault, Régis

Abstract

Because much of work incentives are provided through promotions, their effectiveness depends to a large extent on the structure of the organization's hierarchy. Here, we investigate the impact of the incentive motive on the optimal hierarchy using the Auriol-Renault [2000] framework which highlights the role of recognition in the work place. This framework provides a rationale for using promotions as an incentive device which relies on a complementarity between recognition and income: those who earn more should also earn more recognition. We identify factors which affect the hierarchy in terms of number of ranks, population size at each rank and the extent of the differentiation between ranks. We show that the harder it is for an employee to improve performance through effort the more pyramid-like is the hierarchy, with a small group of successful individuals at the top earning high income and recognition. If a high performance may be easily achieved, a seniority based promotion system may be optimal.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 105.

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Date of creation: 2000
Date of revision: 2001
Publication status: Published in Annales d'Économie et de Statistique, n°63-64, Institut national de la statistique et des études économiques, Paris, juillet-décembre 2001, p.�261-282.
Handle: RePEc:ide:wpaper:783

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  1. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, vol. 38(8), pages 1527-1553, October.
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  4. Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-16, March.
  5. Malcomson, James M & Spinnewyn, Frans, 1988. "The Multiperiod Principal-Agent Problem," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 391-407, July.
  6. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  7. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  8. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-57, July.
  9. Sheryl Ball & Catherine Eckel & Philip J. Grossman & William Zame, 2001. "Status In Markets," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 161-188, February.
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Cited by:
  1. Emmanuelle Auriol & Régis Renault, 2007. "Status and Incentives," THEMA Working Papers 2007-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Fershtman, Chaim & Hvide, Hans K & Weiss, Yoram, 2003. "Cultural Diversity, Status Concerns and the Organization of Work," CEPR Discussion Papers 3982, C.E.P.R. Discussion Papers.
  3. Auriol, Emmanuelle & Renault, Régis, 2000. "The Costs and Benefits of Symbolic Differentiation in the Work Place," IDEI Working Papers 101, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2002.

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