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Sales contests, promotion decisions and heterogeneous risk

Author

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  • James W. Bono

    (Economics Department, University of California, Irvine, CA, USA)

Abstract

This paper examines a general model of sales contests in which agents have heterogeneous attitudes toward risk. It shows that agents that are less risk averse have a higher probability of success. A corollary to this result shows that when absolute risk aversion is decreasing in wealth, wealthier agents have a higher probability of promotion. The same wealth effect makes it possible for more risk averse agents to take greater risks in a multi-round promotion tournament. Next, a stability analysis shows that these equilibria are attractors under a best response dynamic. While it is well-known that sales contests can be an effective incentive device for eliciting effort from employees, this research suggests the added benefit that when used as a basis for promotion decisions, sales contests act to filter the hardest working agents to the top of the corporate hierarchy. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • James W. Bono, 2008. "Sales contests, promotion decisions and heterogeneous risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(4), pages 371-382.
    • Handle: RePEc:wly:mgtdec:v:29:y:2008:i:4:p:371-382
    DOI: 10.1002/mde.1412
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    References listed on IDEAS

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    Cited by:

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    2. Marco Sahm, 2010. "The Contest Winner: Gifted or Venturesome?," CESifo Working Paper Series 3285, CESifo.

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