Contests to Become CEO: Incentives, Selection and Handicaps
AbstractShould a firm favor insiders (handicap outsiders) when selecting a CEO? One reason to do so is to take advantage of the contest to become CEO as a device for providing current incentives to employees. An important reason not to do so is that this can reduce the ability of future CEOs and, hence, future profits. The trade-off between providing current incentives and selecting the most able individual to become CEO is the focus of this paper. If insiders are good enough (better or nearly as good as outsiders), it is typically optimal to handicap outsiders, sometimes so severely that they have no chance to win the contest. However, if outsiders are sufficiently better than insiders, selection dominates and it is the insiders who are severely handicapped. Our model provides useful insight into contests to become CEO and rationalizes empirical regularities in the source of CEOs chosen by firms.
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Bibliographic InfoPaper provided by North Carolina State University, Department of Economics in its series Working Paper Series with number 002.
Length: 34 pages
Date of creation:
Date of revision: Jul 2004
Other versions of this item:
- Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer, vol. 30(2), pages 195-221, February.
- NEP-BEC-2004-11-07 (Business Economics)
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