Promotion Tournaments and Individual Performance Pay ∗
نویسندگان
چکیده
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. Thus, promotion tournaments and individual performance pay need to be combined to serve both incentive and selection purposes. We find that, if it is sufficiently important to promote the most suitable candidate, the principal provides incentives only by means of a promotion tournament. Thus, we give a possible explanation as to why, in practice, individual performance pay is less prevalent than promotion-based incentive systems. JEL Classification: D82, D86, M52.
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