| Author/Presenter |
Veikko Thiele (University of British Columbia) |
| Co-author |
Anja Schöttner (Humboldt University Berlin) |
| Title |
On the Optimal Combination of Promotion Tournaments and Individual Performance Pay |
| Abstract |
We analyze the optimal combination of promotion tournaments and individual performance pay in an employment relationship. Agents' efforts are non-observable and they have private information about their suitability for promotion. We find that the principal does not provide individual incentives if it is sufficiently important to promote the most able candidate. Thus, we give a possible explanation for why individual performance schemes might be less often observed than theory predicts. Furthermore, optimally trading off incentive and selection issues causes a form of the Peter Principle to arise: The less able agent has an inefficiently high probability of promotion. |
| Web Link |
http://economics.ca/2007/papers/0075.pdf |