Lifetime Incentive, Group Norm and Commitment within Hierarchical Organization

A tournament model with overlapping generation structure is presented. I characterize equilibria in Markov strategies taken by a value-maximizing firm with endogenous contestant pool and show that the firm has to determine heterogeneity of contestant pool and balance expected period profits across states, which generates either “fast track effect” or “seniority effect”. Furthermore, contestant heterogeneity in life stage plays an important role in achieving gains from collusion among agents. I show self-enforcing side contracts as an informal institutional arrangement make some more efficient efforts allocation possible and thus provide an understanding of informal structure in organization. Finally, the property of fixed wage bill fails in the context of OLG tournament, which is to say, performance reporting matters for the interests of organization. Then, a truth-telling mechanism based on reputation is considered to eliminate moral hazard from firm’s side.