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Incentive Hierarchies

  • Auriol, Emmanuelle
  • Renault, Régis

Because much of work incentives are provided through promotions, their effectiveness depends to a large extent on the structure of the organization's hierarchy. Here, we investigate the impact of the incentive motive on the optimal hierarchy using the Auriol-Renault [2000] framework which highlights the role of recognition in the work place. This framework provides a rationale for using promotions as an incentive device which relies on a complementarity between recognition and income: those who earn more should also earn more recognition. We identify factors which affect the hierarchy in terms of number of ranks, population size at each rank and the extent of the differentiation between ranks. We show that the harder it is for an employee to improve performance through effort the more pyramid-like is the hierarchy, with a small group of successful individuals at the top earning high income and recognition. If a high performance may be easily achieved, a seniority based promotion system may be optimal.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 105.

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Date of creation: 2000
Date of revision: 2001
Publication status: Published in Annales d'Économie et de Statistique, n°63-64, Institut national de la statistique et des études économiques, Paris, juillet-décembre 2001, p.�261-282.
Handle: RePEc:ide:wpaper:783
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  1. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  2. Sheryl Ball & Catherine Eckel & Philip J. Grossman & William Zame, 2001. "Status In Markets," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 161-188, February.
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  5. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  6. Mathias Dewatripont & Patrick Bolton, 2004. "The firm as a communication network," ULB Institutional Repository 2013/9599, ULB -- Universite Libre de Bruxelles.
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