Competitive Careers as a Way to Mediocracy

We show that incompetitive careers based on individual performance the least productive individuals may have the highest probabilities to be promoted to top positions. These individuals have the lowest fall-back positions and, hence, the highest incentives to succeed in career contests. This detrimental incentive effect exists irrespective of whether effort and talent are substitutes or complements in the underlying contest-success function. However, in case of complements the incentive effect may be be outweighed by a productivity effect that favors high effort choices by the more talented individuals

Doping in Contest-Like Situations

Individuals who compete in a contest-like situation (for example, in sports, in promotion tournaments, or in an appointment contest) may have an incentive to illegally utilize resources in order to improve their relative positions. We analyze such doping within a tournament game between two heterogeneous players. Three major effects are identified which determine a player’s doping decision — a cost effect, a likelihood effect and a windfall-profit effect. Moreover, we discuss whether the favorite or the underdog is more likely to be doped, the impact of doping on overall performance, the influence of increased heterogeneity on doping, the welfare implications of doping, and possible prevention of doping

Authority and Incentives in Organizations

The paper analyzes the choice of organizational structure as solution to the trade-off between controlling behavior based on authority rights and minimizing costs for implementing high efforts. The analysis includes the owner of a firm, a top manager and two division heads. If it is more expensive to incentivize the division heads, the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control. In that situation, decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns, but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial. If, however, incentivizing the division heads is clearly less expensive than creating incentives for the top manager, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial

Limited Liability and the Trade-off between Risk and Incentives

Several empirical findings have challenged the traditional trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained

Firm Size, Economic Situation and Influence Activities

This paper discusses the optimal firm size in the presence of influence activities, and the level of individual rent-seeking dependent on the economic situation of the firm. Since firm size has a discouraging effect on the level of individual rent-seeking but also a quantity effect as the number of rent-seekers increases, the interplay of both effects determines whether the employer chooses an inefficiently small or large firm size. In the given setting, a bad economic situation leads to both a higher probability of a substantial loss and a reduction of productivity. The productivity effect and the two other effects together determine the optimal level of individual rent-seeking

On the "Adverse Selection" of Organizations

According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed

Delegation and Strategic Compensation in Tournaments

This paper considers a two-stage game with two owners and two managers. On the first stage, the owners choose a linear combination of profits and sales as incentives for their managers. On the second stage, the two managers compete in a tournament against each other. In a symmetric equilibrium, both owners induce their managers to maximize profits. In asymmetric equilibria, however, one owner puts a positive weight on sales and the other a negative weight.

Limited Liability and the Trade-off between Risk and Incentives

Several empirical findings have challenged the traditional trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained.limited liability; piece rates; risk aversion; risk-incentives trade-off

Firm Size, Economic Situation and Influence Activities

This paper discusses the optimal firm size in the presence of influence activities, and the level of individual rent-seeking dependent on the economic situation of the firm. Since firm size has a discouraging effect on the level of individual rent-seeking but also a quantity effect as the number of rent-seekers increases, the interplay of both effects determines whether the employer chooses an inefficiently small or large firm size. In the given setting, a bad economic situation leads to both a higher probability of a substantial loss and a reduction of productivity. The productivity effect and the two other effects together determine the optimal level of individual rent-seeking.economic situation; firm size; influence activities; politicking; rent-seeking

Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric