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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rajesh K. Aggarwal & Andrew A. Samwick, 1999.
"Performance Incentives Within Firms: The Effect of Managerial Responsibility,"
NBER Working Papers
7334, National Bureau of Economic Research, Inc.
- Rajesh K. Aggarwal & Andrew A. Samwick, 2003. "Performance Incentives within Firms: The Effect of Managerial Responsibility," Journal of Finance, American Finance Association, vol. 58(4), pages 1613-1650, 08.
- Joao Ricardo Faria, 2000. "An Economic Analysis of the Peter and Dilbert Principles," Working Paper Series 101, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- Rosen, Sherwin, 1986.
"Prizes and Incentives in Elimination Tournaments,"
American Economic Review,
American Economic Association, vol. 76(4), pages 701-15, September.
- Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
- Edward P. Lazear, 2004. "The Peter Principle: A Theory of Decline," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S141-S163, February.
- DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
- Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
- Hao Jia & Stergios Skaperdas & Samarth Vaidya, 2012.
"Contest Functions: Theoretical Foundations and Issues in Estimation,"
111214, University of California-Irvine, Department of Economics.
- Jia, Hao & Skaperdas, Stergios & Vaidya, Samarth, 2013. "Contest functions: Theoretical foundations and issues in estimation," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 211-222.
- repec:ebl:ecbull:v:4:y:2007:i:41:p:1-9 is not listed on IDEAS
- Riis, Christian, 2008. "Efficient Contests," MPRA Paper 10906, University Library of Munich, Germany.
- Theofanis Tsoulouhas & Kosmas Marinakis, 2007.
"Tournaments with Ex Post Heterogeneous Agents,"
AccessEcon, vol. 4(41), pages 1-9.
- Oliver Gürtler, 2010. "Collusion in homogeneous and heterogeneous tournaments," Journal of Economics, Springer, vol. 100(3), pages 265-280, July.
- Kosmas Marinakis & Theofanis Tsoulouhas, 2012. "A comparison of cardinal tournaments and piece rate contracts with liquidity constrained agents," Journal of Economics, Springer, vol. 105(2), pages 161-190, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Theofanis Tsoulouhas) The email address of this maintainer does not seem to be valid anymore. Please ask Theofanis Tsoulouhas to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.