IDEAS home Printed from https://ideas.repec.org/a/aea/aejmic/v8y2016i3p1-38.html

Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits

Author

Listed:
  • Philippe Aghion
  • Matthew O. Jackson

Abstract

How can a principal (employer or voter) induce an agent (worker or politician) to choose the "right" actions if risky actions reveal the agent's decision making competence and only dismissal can be used as an incentive instrument? We first show that if the principal can commit to a replacement strategy, then optimal mechanisms involve either (i) a probationary period and then indefinite tenure, or (ii) dismissing poorly performing agents but also randomly replacing agents who take nonrevealing actions. When the principal cannot commit, incentives can be improved by imposing term limits on agents.

Suggested Citation

  • Philippe Aghion & Matthew O. Jackson, 2016. "Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 1-38, August.
    • Handle: RePEc:aea:aejmic:v:8:y:2016:i:3:p:1-38
    Note: DOI: 10.1257/mic.20150083
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/articles?id=10.1257/mic.20150083
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=9Vtja1GERJFBeOu6jv7V_Eih9-SL0OKL
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=WUDJZehqPbeBrKnxCiSA6LpLhB1Ox6e7
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alessandro Bonatti & Johannes Horner, 2011. "Career Concerns and Market Structure," Cowles Foundation Discussion Papers 1831R, Cowles Foundation for Research in Economics, Yale University, revised Oct 2013.
    2. Alberto Alesina & Guido Tabellini, 2007. "Bureaucrats or Politicians? Part I: A Single Policy Task," American Economic Review, American Economic Association, vol. 97(1), pages 169-179, March.
    3. Alesina, Alberto & Tabellini, Guido, 2008. "Bureaucrats or politicians? Part II: Multiple policy tasks," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 426-447, April.
    4. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    5. Jean Tirole, 1996. "A Theory of Collective Reputations (with applications to the persistence of corruption and to firm quality)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(1), pages 1-22.
    6. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The Economics of Career Concerns, Part II: Application to Missions and Accountability of Government Agencies," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 199-217.
    7. Canes-Wrone, Brandice & Shotts, Kenneth W., 2007. "When Do Elections Encourage Ideological Rigidity?," American Political Science Review, Cambridge University Press, vol. 101(2), pages 273-288, May.
    8. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(2), pages 415-441.
    9. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
    10. Taylor, Curtis R, 2000. "The Old-Boy Network and the Young-Gun Effect," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 871-891, November.
    11. Alvaro Sandroni & Rann Smorodinsky & Rakesh V. Vohra, 2003. "Calibration with Many Checking Rules," Mathematics of Operations Research, INFORMS, vol. 28(1), pages 141-153, February.
    12. Mattozzi, Andrea & Merlo, Antonio, 2008. "Political careers or career politicians?," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 597-608, April.
    13. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
    14. Claudio Ferraz & Frederico Finan, 2011. "Electoral Accountability and Corruption: Evidence from the Audits of Local Governments," American Economic Review, American Economic Association, vol. 101(4), pages 1274-1311, June.
    15. Harrington, Joseph E, Jr, 1993. "Economic Policy, Economic Performance, and Elections," American Economic Review, American Economic Association, vol. 83(1), pages 27-42, March.
    16. Eddie Dekel & Yossi Feinberg, 2006. "Non-Bayesian Testing of a Stochastic Prediction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 893-906.
    17. Navin Kartik & R. Preston McAfee, 2007. "Signaling Character in Electoral Competition," American Economic Review, American Economic Association, vol. 97(3), pages 852-870, June.
    18. Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 423-444, October.
    19. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-1134, December.
    20. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 453-472, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pavesi, Filippo & Scotti, Massimo, 2022. "Good lies," European Economic Review, Elsevier, vol. 141(C).
      • Filippo Pavesi & Massimo Scotti, 2019. "Good Lies," Working Paper Series 39, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Volker Laux, 2017. "Supporting and Assessing Agents," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 55(4), pages 995-1016, September.
    3. Marina Halac & Ilan Kremer, 2020. "Experimenting with Career Concerns," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 260-288, February.
    4. Fausto Panunzi & Nicola Pavoni & Guido Tabellini, 2020. "Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences," Working Papers 670, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Rahul Deb & Mallesh M. Pai & Maher Said, 2018. "Evaluating Strategic Forecasters," American Economic Review, American Economic Association, vol. 108(10), pages 3057-3103, October.
    6. Benjamin Davies, 2022. "Why do experts give simple advice?," Papers 2209.11710, arXiv.org.
    7. Rahul Deb & Matthew Mitchell & Mallesh Pai, 2019. "Our distrust is very expensive," Working Papers tecipa-632, University of Toronto, Department of Economics.
    8. Timothy Perri, 2018. "Economics of evaluation (with special reference to promotion and tenure committees)," Economics of Governance, Springer, vol. 19(1), pages 1-19, February.
    9. Yamasaki, Junichi, 2020. "Time horizon of government and public goods investment: Evidence from Japan," Journal of Development Economics, Elsevier, vol. 146(C).
    10. Kim, Doyoung, 2017. "Motivating for new changes when agents have reputation concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 37-53.
    11. Raphael Boleslavsky, 2023. "Waiting for Fake News," Papers 2304.04053, arXiv.org, revised Apr 2023.
    12. Schottmüller, Christoph, 2019. "Too good to be truthful: Why competent advisers are fired," Journal of Economic Theory, Elsevier, vol. 181(C), pages 333-360.
    13. Scott C. Ganz, 2020. "Hyperopic Search: Organizations Learning About Managers Learning About Strategies," Organization Science, INFORMS, vol. 31(4), pages 821-838, July.
    14. Rohan DUTTA & Pierre-Yves YANNI, 2017. "On Inducing Agents with Term Limits to Take Appropriate Risk," Cahiers de recherche 06-2017, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    15. Pegoraro, Stefano, 2024. "Risk aversion with nothing to lose," Journal of Economic Theory, Elsevier, vol. 221(C).
    16. Mehmet Ekmekci & Leandro Gorno & Lucas Maestri & Jian Sun & Dong Wei, 2022. "Learning from Manipulable Signals," American Economic Review, American Economic Association, vol. 112(12), pages 3995-4040, December.
    17. Deb, Rahul & Mitchell, Matthew & Pai, Mallesh M., 2022. "(Bad) reputation in relational contracting," Theoretical Economics, Econometric Society, vol. 17(2), May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ash, Elliott & MacLeod, W. Bentley, 2021. "Reducing partisanship in judicial elections can improve judge quality: Evidence from U.S. state supreme courts," Journal of Public Economics, Elsevier, vol. 201(C).
    2. Alessandra Bonfiglioli & Gino Gancia, 2010. "The political cost of reforms (preliminar version of working paper number 1360: Uncertainty, electoral incentives and political myopia)," Economics Working Papers 1250, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2011.
    3. Nobuhiro Mizuno & Ryosuke Okazawa, 2022. "Why do voters elect less qualified candidates?," Journal of Theoretical Politics, , vol. 34(3), pages 443-477, July.
    4. Iaryczower, Matias & Lewis, Garrett & Shum, Matthew, 2013. "To elect or to appoint? Bias, information, and responsiveness of bureaucrats and politicians," Journal of Public Economics, Elsevier, vol. 97(C), pages 230-244.
    5. Heski Bar-Isaac, 2007. "Something to prove: reputation in teams," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 495-511, June.
    6. Galina Zudenkova, 2015. "Political cronyism," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(3), pages 473-492, March.
    7. Calogero Guccio & Domenico Lisi & Ilde Rizzo, 2019. "When the purchasing officer looks the other way: on the waste effects of debauched local environment in public works execution," Economics of Governance, Springer, vol. 20(3), pages 205-236, September.
    8. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    9. Alessandra Bonfiglioli & Gino Gancia, 2010. "The Political Cost of Reforms," UFAE and IAE Working Papers 847.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC), revised 30 May 2011.
    10. Georgy Egorov & Konstantin Sonin, 2013. "A Political Theory of Populism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 771-805.
    11. Linda Gonçalves Veiga & Francisco veiga, 2016. "Term limits at the local government level," NIPE Working Papers 7/2016, NIPE - Universidade do Minho.
    12. Vukovic, Vuk, 2011. "Political agency model of persistent electoral success with endogenous rents," MPRA Paper 39085, University Library of Munich, Germany, revised 25 Jan 2012.
    13. Huan-yu Cui & Yue-qun Cao, 2025. "The Impact of Pollution Levies on Firms’ Energy Consumption and Production: Evidence from China’s Pollution Levy Standard Reform," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 88(6), pages 1581-1620, June.
    14. Zudenkova, Galina, 2011. "Cronyism in Business, Public Sector and Politics," Working Papers 2072/151814, Universitat Rovira i Virgili, Department of Economics.
    15. repec:bge:wpaper:507 is not listed on IDEAS
    16. Alexander Whalley, 2013. "Elected versus Appointed Policy Makers: Evidence from City Treasurers," Journal of Law and Economics, University of Chicago Press, vol. 56(1), pages 39-81.
    17. Heski Bar-Isaac, 2004. "Something to Prove: Reputation in teams and hiring to introduce uncertainty," Working Papers 04-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    18. Francisco Rodríguez & Eduardo Zambrano, 2022. "Monotone comparative statics in the Calvert–Wittman model," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 105-116, May.
    19. Bostashvili, David & Ujhelyi, Gergely, 2019. "Political budget cycles and the civil service: Evidence from highway spending in US states," Journal of Public Economics, Elsevier, vol. 175(C), pages 17-28.
    20. Aytimur, R. Emre & Bruns, Christian, 2015. "On ignorant voters and busy politicians," University of Göttingen Working Papers in Economics 252, University of Goettingen, Department of Economics.
    21. Chen, Yvonne Jie & Li, Pei & Lu, Yi, 2018. "Career concerns and multitasking local bureaucrats: Evidence of a target-based performance evaluation system in China," Journal of Development Economics, Elsevier, vol. 133(C), pages 84-101.
    22. Bramoullé, Yann & Goyal, Sanjeev, 2016. "Favoritism," Journal of Development Economics, Elsevier, vol. 122(C), pages 16-27.

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmic:v:8:y:2016:i:3:p:1-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.