Too Big to Succeed? Overstaffing in Firms

Abstract

Overstaffng appears to be a source of signicant ineffciencies in organizations, but there is little economic theory that informs us why. We extend the canonical Lazear-Rosen tournament model to a dynamic setting that yields overstaffng at the managerial level. Overstaffng can be optimal in first best, without moral hazard, if the redundant manager gains experience and increases the firm's future productivity. In second best, overstaffing can be a way to provide incentives to young workers without "overpaying" middle-aged workers, a mechanism that is illustrated with several examples from real world organizations. The model may offer some independent interest by integrating a generational structure into a tournament model.

Keywords: Bureaucracy, Overstaffing, Personnel economics, Productive efficiency, Promotions, Tournament

JEL Classification: D86, J31, M51