Promotions, incentives and the market for corporate control

This thesis addresses a number of questions relating to labour market transactions and the theory of the firm. Chapter one provides a brief overview of the literature.Chapter two examines why promotions are used to provide incentives. When employee performance is non-verifiable information, rank-order tournaments are more effective than performance-related pay. However, tournaments are shown to be vulnerable to bribery and influence activities. Promotions, which resemble tournaments, have similar defects but these effects are mitigated if workers differ in their suitability for higher-paid jobs The optimal promotion scheme in such an environment is examined, and incentives are indeed shown to result.Chapter three examines the use of promotions and demotions in a three-period model. In contrast to chapter two, firms alone observe workers' performance and there is a single wage per assignment. It is shown that if firms can commit to the numbers of assignments, and if workers are risk neutral, then there will be full incentive provision in all periods but the last. Furthermore, the firm does not need to misassign any workers in order to accomplish this. This chapter also examines some implications of the firm being able to commit only to the numbers of jobs.Chapter four explains why firms may obtain managers through take-over rather than recruitment in the labour market. Direct recruitment is costly if managers are risk averse, because risk premia must be added to the performance contracts that are required to screen out good managers from bad. The profitability of direct recruitment and take-over are compared, and influence over the recruitment/take-over decision are examined. The chapter discusses the alternative role of take-over in disciplining rather than replacing managers. (DX184263)