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External Recruitment as an Incentive Device

  • Kong-Pin Chen

    (Academia Sinica and National Taiwan University)

External recruitment is often believed to be harmful in that it trades off the need for outside talents with the incentives of inside workers. This article shows that, even from an incentive viewpoint, external recruitment has its powerful function. Specifically, if promotion is based on relative performance, then negative activities (sabotages) are a valuable instrument for competition. This results in inefficiency of the firm. External recruitment, by reducing the marginal return of negative effort relative to that of productive effort, restores the incentives in productive activity. Even without sabotage concern, external recruitment can avoid shirking equilibrium or prevent workers' collusion.

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File URL: http://dx.doi.org/10.1086/428024
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 23 (2005)
Issue (Month): 2 (April)
Pages: 259-278

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Handle: RePEc:ucp:jlabec:v:23:y:2005:i:2:p:259-278
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  1. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  2. Canice Prendergast, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 523-534.
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  9. Edward P. Lazear & Paul Oyer, 2003. "Internal and External Labor Markets: A Personnel Economics Approach," NBER Working Papers 10192, National Bureau of Economic Research, Inc.
  10. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  11. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2004. "Relative and Absolute Incentives: Evidence on Worker Productivity," CEPR Discussion Papers 4431, C.E.P.R. Discussion Papers.
  12. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  13. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  14. Clive Bull, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 147-159.
  15. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
  16. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  17. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
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