IDEAS home Printed from https://ideas.repec.org/p/ags/quedwp/273670.html

Promotion Tournaments in Market Equilibrium

Author

Listed:
  • Zabojnik, Jan

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.

Suggested Citation

  • Zabojnik, Jan, 2008. "Promotion Tournaments in Market Equilibrium," Queen's Economics Department Working Papers 273670, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273670
    DOI: 10.22004/ag.econ.273670
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/273670/files/qed_wp_1193.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.273670?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    2. Benny Moldovanu & Aner Sela, 2008. "The Optimal Allocation of Prizes in Contests," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 615-631, Springer.
    3. repec:bla:jfinan:v:43:y:1988:i:3:p:593-616 is not listed on IDEAS
    4. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    5. Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," CEPR Discussion Papers 3558, C.E.P.R. Discussion Papers.
    6. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-364, June.
    7. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 921-955.
    8. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
    9. MacLeod, W Bentley & Malcomson, James M, 1988. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 832-854, August.
    10. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
    11. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
    12. repec:fal:wpaper:06007 is not listed on IDEAS
    13. Lazear, Edward P. & Oyer, Paul, 2004. "Internal and external labor markets: a personnel economics approach," Labour Economics, Elsevier, vol. 11(5), pages 527-554, October.
    14. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 881-919.
    15. Katz, Eliakim & Ziderman, Adrian, 1990. "Shared investment in general training : the role of information," Policy Research Working Paper Series 535, The World Bank.
    16. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    17. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 191-213.
    18. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
    19. Sherwin Rosen, 1972. "Learning and Experience in the Labor Market," Journal of Human Resources, University of Wisconsin Press, vol. 7(3), pages 326-342.
    20. Chang, Chun & Wang, Yijiang, 1996. "Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 505-519, July.
    21. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.
    22. Waldman, Michael, 1990. "Up-or-Out Contracts: A Signaling Perspective," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 230-250, April.
    23. Katz, Eliakim & Ziderman, Adrian, 1990. "Investment in General Training: The Role of Information and Labour Mobility," Economic Journal, Royal Economic Society, vol. 100(403), pages 1147-1158, December.
    24. Bruce C. Greenwald, 1986. "Adverse Selection in the Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(3), pages 325-347.
    Full references (including those not matched with items on IDEAS)

    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. Jan Zabojnik, 2008. "Promotion Tournaments In Market Equilibrium," Working Paper 1193, Economics Department, Queen's University.
    2. Ján Zábojník, 2012. "Promotion tournaments in market equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 213-240, September.
    3. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    4. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    5. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    6. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    7. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    8. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    9. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    11. Pablo Acosta, 2004. "Promotions, State Dependence and Intrafirm Job Mobility: Evidence From Personnel Records," Econometric Society 2004 North American Summer Meetings 585, Econometric Society.
    12. Prasad, Suraj & Tran, Hien, 2013. "Work practices, incentives for skills, and training," Labour Economics, Elsevier, vol. 23(C), pages 66-76.
    13. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
    14. Jed DeVaro & Antti Kauhanen, 2016. "An “Opposing Responses” Test of Classic versus Market-Based Promotion Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 747-779.
    15. Luca Picariello, 2019. "Promotions and Training: Do Competitive Firms Set the Bar too High?," CSEF Working Papers 552, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    16. Christian Belzil & Michael Bognanno, 2010. "The promotion dynamics of American executives," Research in Labor Economics, in: Jobs, Training, and Worker Well-being, pages 189-231, Emerald Group Publishing Limited.
    17. Malcomson, James M. & Maw, James W. & McCormick, Barry, 2003. "General training by firms, apprentice contracts, and public policy," European Economic Review, Elsevier, vol. 47(2), pages 197-227, April.
    18. Edwin Leuven, 2005. "The Economics of Private Sector Training: A Survey of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 91-111, February.
    19. Cassidy, Hugh & DeVaro, Jed & Kauhanen, Antti, 2016. "Promotion signaling, gender, and turnover: New theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 140-166.
    20. Robert Gibbons & Michael Waldman, 1998. "A Theory of Wage and Promotion Dynamics in Internal Labor Markets," NBER Working Papers 6454, National Bureau of Economic Research, Inc.
    21. Luis Garicano & Luis Rayo, 2017. "Relational Knowledge Transfers," American Economic Review, American Economic Association, vol. 107(9), pages 2695-2730, September.
    22. Myers, Erica, 2020. "Asymmetric information in residential rental markets: Implications for the energy efficiency gap," Journal of Public Economics, Elsevier, vol. 190(C).

    More about this item

    Keywords

    ;
    ;

    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:ags:quedwp:273670. 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: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.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.