Promotion Tournaments in Market Equilibrium

Posted: 18 Jan 2014

See all articles by Jan Zabojnik

Jan Zabojnik

Queen's University - Department of Economics

Date Written: January 24, 2011

Abstract

This paper studies how promotion tournaments motivate workers to accumulate human capital when wages are constrained by outside labor markets. Patient firms can retain some control over tournament prizes through a relational contract, but if the firms are competitive, full efficiency does not obtain in equilibrium even for discount factors arbitrarily close to one. Full efficiency, however, may be feasible in firms with superior technologies; thus, technological efficiency breeds incentive efficiency. The paper also shows that a wage floor leads to insufficient human capital investment in competitive firms, but could lead to excessive investment in technologically superior firms.

Keywords: Promotions, Tournaments, Relational contracts, Human capital investment

JEL Classification: C73, J31, L14, M5

Suggested Citation

Zabojnik, Jan, Promotion Tournaments in Market Equilibrium (January 24, 2011). Economic Theory, Vol. 51, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2316382

Jan Zabojnik (Contact Author)

Queen's University - Department of Economics ( email )

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Kingston, Ontario K7L 3N6
Canada
613-533-2275 (Phone)
613-533-6668 (Fax)

HOME PAGE: http://qed.econ.queensu.ca/faculty/zabojnik/Page/

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