Interpersonal Comparison, Status and Ambition in Organizations
University of Oxford Economics Discussion Paper No. 222
Journal of Economic Behavior and Organization, Vol. 75, No. 2, 2010
37 Pages Posted: 21 Apr 2005 Last revised: 8 Jul 2017
Date Written: March 1, 2010
Abstract
This paper shows that introducing status concerns into a tournament model has substantial implications for the provision of incentives. We emphasize the role of reference groups and determine the optimal number of winners and losers in tournaments. To compensate employees for the disutility of low status, a profit-maximizing employer may be reluctant to demote employees and instead reward workers through promotions. This rationalizes the prevalence of compensation systems which reward winners without explicitly identifying losers. Differences in ambition and ability affect contestants' efforts and may result in inefficient promotion outcomes. We analyze how to mitigate these inefficiencies when managing a diverse workforce by using mixed and segregated tournaments.
Keywords: Reference-Dependent Preferences, Status, Ambition, Tournaments
JEL Classification: J31, J41
Suggested Citation: Suggested Citation
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