Incentives Versus Synergies in Markets for Talent

44 Pages Posted: 6 Mar 2004  

Bharat N. Anand

Harvard University - Strategy Unit

Alexander Galetovic

Universidad de los Andes

Alvaro A. Stein

University of Chile - Center of Applied Economics (CEA)

Date Written: January 2004

Abstract

We study what type of organization will host projects where talented individuals are pivotal. A cash-constrained and talented individual must invest in acquiring a skill essential to execute a project. Skill acquisition may be financed by either a corporation, which inserts the project into its pre-existing organization; or a specialist that finances single-project firms. The specialist can make talent the residual claimant. The corporation can exploit cross-project synergies by centralizing operations, which weakens incentives. Property rights may be weak: talent may leave and develop the project elsewhere after acquiring the skill.

We find that weak property rights help corporations: for a given level of centralization, both effort and profits increase as property rights weaken. When the corporation can freely choose the strength of property rights and centralization, we find that, first, weak property rights are preferred; and, second, the corporation always chooses some centralization, eschewing first-best effort incentives. Moreover, whenever the corporation finances, it is socially effcient.

We apply the model to examine several apparently puzzling phenomena in markets for talent. These include dominance by large firms despite severe conflicts of interest and high effort exertion by talent within large firms.

Keywords: Conflicts of interest, corporations, outside option, second-best principle, self-dealing, weak property rights

JEL Classification: D23, L23

Suggested Citation

Anand, Bharat N. and Galetovic, Alexander and Stein, Alvaro A., Incentives Versus Synergies in Markets for Talent (January 2004). Available at SSRN: https://ssrn.com/abstract=513042 or http://dx.doi.org/10.2139/ssrn.513042

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Alexander Galetovic

Universidad de los Andes ( email )

San Carlos de Apoquindo 2200
Santiago
Chile
+56/2/412 9259 (Phone)
+56/2/214 2006 (Fax)

Alvaro A. Stein

University of Chile - Center of Applied Economics (CEA)

Republica 701
Casilla 2777
Santiago
Chile

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