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External Recruitment as an incentive Device

  • Kong-Pin Chen

External recruitment has often been viewed as a necessary evil in that it trades off the need for outside talents with the incentives of inside workers. This paper, however, shows that even from an incentive viewpoint, external recruitment has its positive role to play. Specifically, if promotion is based on relative performance, then negative activities in the form of sabotage are a valuable instrument to compete. This results in inefficiency of the workers' efforts and performance of the firm. External recruitment, by reducing the marginal return of negative activity relative to that of productive activity, can restore the incentives of the workers to engage in productive activity and enhances the firm's performance. We also show that even when negative activities are not a concern, external recruitment can sometimes avoid the shirking equilibrium, or prevents collusion of the workers

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 54.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:54
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  1. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  2. 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.
  3. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  4. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
  5. Leonardo Felli & J. Miguel Villas-Boas, 2000. "Renegotiation and Collusion in Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 453-483, December.
  6. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February.
  7. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  8. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  9. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  10. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
  11. Zabojnik, Jan & Bernhardt, Dan, 2001. "Corporate Tournaments, Human Capital Acquisition, and the Firm Size-Wage Relation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 693-716, July.
  12. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  13. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
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