Incentives Versus Synergies in Markets for Talent
44 Pages Posted: 6 Mar 2004
Date Written: January 2004
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: Suggested Citation