Tournaments, Individualized Contracts and Career Concerns

Alexander Koch and Eloic Peyrache (peyrache@hec.fr)
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Eloic Peyrache: HEC Paris

No 1841, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Young professionals typically do not enter into life-long employment relations with a single firm. Therefore, future employers can learn about individuals' abilities from the observable facts regarding earlier work relations. We show that these informational spill-overs have profound implications for organizational design and the resulting optimal incentive contracts. Through the organizational choice and the contracts that it offers individuals, a firm can strategically manipulate the flow of information to future employers and sharpen incentives. Using a simple moral hazard model, we demonstrate that relative performance contracts, such as rank-order tournaments, can be optimal even though the extant explanations for the optimality of such compensation schemes are absent. The paper discusses the distortions that can arise and explores the robustness of the result.

Keywords: asymmetric learning; relative performance contracts; tournaments; reputation (search for similar items in EconPapers)
JEL-codes: D82 J33 L14 M52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-11
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published - revised and extended version published as 'Aligning Ambition and Incentives' in: Journal of Law, Economics, and Organization , 2011, 27(1).

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