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Promotion Tournaments in Market Equilibrium

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Author Info
Jan Zabojnik () (Queen's University)

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Abstract

Standard models of promotion tournaments assume that firms can commit to arbitrary tournament prizes. In this paper, a firm's ability to adjust tournament prizes is constrained by the outside labor market, through the wages other firms are willing to offer to the promoted and unpromoted workers. The paper shows that sufficiently patient firms may be able to retain some control over the tournament prizes through a relational contract, but if the firms are competitive, full efficiency does not obtain in equilibrium even for discount factors arbitrarily close to one. Full efficiency, however, may be feasible in firms with supranormal profits (monopolistic firms). The paper also shows that a minimum wage regulation distorts the workers' investments in human capital by restricting the firms' abilities to design efficient promotion tournaments. A minimum wage thus leads to underinvestment in competitive firms, but could lead to excessive human capital accumulation in monopolistic firms.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1193.pdf
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1193.

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Length: 35 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:qed:wpaper:1193

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Related research
Keywords: Promotion tournaments; Relational contracts;

Other versions of this item:

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  19. Zabojnik, Jan & Bernhardt, Dan, 2001. "Corporate Tournaments, Human Capital Acquisition, and the Firm Size-Wage Relation," Review of Economic Studies, Blackwell Publishing, vol. 68(3), pages 693-716, July.
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  31. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Blackwell Publishing, vol. 64(2), pages 191-213, April. [Downloadable!] (restricted)
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  33. Daron Acemoglu & Jörn-Steffen Pischke, 1998. "Why Do Firms Train? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 78-118, February. [Downloadable!] (restricted)
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  34. repec:att:wimass:1919988 is not listed on IDEAS
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This page was last updated on 2009-11-9.

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