Promotion tournaments and individual performance pay

Anja Schöttner and Veikko Thiele

No 2007-045, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: We analyze the optimal combination of promotion tournaments and individual performance pay in an employment relationship. An agent's effort is non-observable and he has private information about his suitability for promotion. We find that the principal does not provide individual incentives if it is sufficiently important to promote the most suitable candidate. Thus, we give a possible explanation for why individual performance schemes are less often observed in practice than predicted by theory. Furthermore, optimally trading off incentive and selection issues causes a form of the Peter Principle: The less suitable agent has an inefficiently high probability of promotion.

Keywords: Promotion Tournaments; Piece Rates; Hidden Characteristics; Hidden Action (search for similar items in EconPapers)
JEL-codes: D82 D86 M52 (search for similar items in EconPapers)
Date: 2007
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Journal Article: Promotion Tournaments and Individual Performance Pay (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2007-045

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