Prestige, Intrafirm Tournaments and Failure Aversion in Corporate Decisions

Working Paper No. 99-003

29 Pages Posted: 20 Aug 1999

See all articles by Todd T. Milbourn

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Richard L. Shockley

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 1999

Abstract

The pervasive "tournament" style of organization is beneficial in that it allows shareholders to place the most talented managers in senior positions. We demonstrate that this benefit is achieved only at a cost: competition for promotions to prestigious positions induces excessive failure aversion among competing managers. Failure aversion emanates from the interaction between the huge rewards promised to the winning manager (the CEO) - the "winner-take-all" phenomenon - and the limited opportunities for managers to influence perceptions about their abilities. Failure aversion in turn corrupts corporate decisions, resulting in distorted project and effort choices. Importantly, it may not be possible to remove the resulting distortions through wage contracts as the organization architecture itself creates implicit contracts that constrain the efficacy of explicit compensation contracts.

JEL Classification: G31, G32, G34

Suggested Citation

Milbourn, Todd T. and Thakor, Anjan V. and Shockley, Richard L., Prestige, Intrafirm Tournaments and Failure Aversion in Corporate Decisions (February 1999). Working Paper No. 99-003, Available at SSRN: https://ssrn.com/abstract=160256 or http://dx.doi.org/10.2139/ssrn.160256

Todd T. Milbourn (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Richard L. Shockley

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-9404 (Phone)
812-855-5875 (Fax)

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