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Worker Discretion and Misallocation of Talent within Firms

Author

Listed:
  • Hans K. Hvide

    (Department of Finance, Norwegian School of Economics and Business)

  • Todd Kaplan

    (Department of Economics, University of Exeter)

Abstract

We develop a theory of worker discretion over task choice within a firm. Increasing the workers’ discretion has a trade-off between the gains from workers using private information about their abilities, and the costs from adverse selection within the firm due to workers herding into prestigious tasks. The theory leads to the result that, in line with the Peter Principle, misallocation of talent within firms takes the form of too many workers undertaking tasks with a high return to ability. Moreover we find that the degree of misallocation of talent is decreasing in the degree of discretion given to workers.

Suggested Citation

  • Hans K. Hvide & Todd Kaplan, 2001. "Worker Discretion and Misallocation of Talent within Firms," Discussion Papers 0108, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0108
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0108.pdf
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    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    4. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    5. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
    6. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
    7. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
    8. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The economic cost of the X Factor
      by chris dillow in Stumbling and Mumbling on 2011-11-23 20:33:46

    More about this item

    Keywords

    Authority; Bureaucracies; Career Concerns; Discretion; Organizational Design; Misallocation; Peter Principle; Principal-Agent Theory; Sun Hydraulics; Wage Dynamics;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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