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Contests to become CEO: incentives, selection and handicaps

Author

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  • Theofanis Tsoulouhas
  • Charles Knoeber
  • Anup Agrawal

Abstract

Should 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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Suggested Citation

  • Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 195-221, February.
    • Handle: RePEc:spr:joecth:v:30:y:2007:i:2:p:195-221
    DOI: 10.1007/s00199-005-0060-8
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    References listed on IDEAS

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