Sales Contests, Promotion Decisions and Heterogeneous Risk
Managerial and Decisions Economics, Forthcoming
Posted: 31 May 2013
Date Written: October 30, 2007
Abstract
This paper examines a general model of sales contests in which agents have heterogeneous attitudes towards risk. It shows that agents that are less risk averse have a higher probability of success. A corollary to this result shows that when absolute risk aversion is decreasing in wealth, wealthier agents have a higher probability of promotion. The same wealth effect makes it possible for more risk averse agents to take greater risks in a multi-round promotion tournament. Next, a stability analysis shows that these equilibria are attractors under a best-response dynamic. While it is well-known that sales contests can be an effective incentive device for eliciting effort from employees, this research suggests the added benefit that when used as a basis for promotion decisions, sales contests act to filter the hardest working agents to the top of the corporate hierarchy.
Keywords: Promotion Tournaments, Heterogeneous Risk, Sales Contests
JEL Classification: C7, M5
Suggested Citation: Suggested Citation
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