Should a firm favor insiders (handicap outsiders) when selecting a CEO? One reason to do so is to take advantage of the contest to become CEO as a device for providing current incentives to employees. An important reason not to do so is that this can reduce the ability of future CEOs and, hence,...

This paper compares relative performance evaluation via tournaments to absolute performance evaluation via piece rates when agents are heterogeneous ex post, to make the point that agent heterogeneity compromises the insurance function of tournaments. In particular, we show that the more...

We argue that outsiders are handicapped in CEO successions to strengthen the incentive that the contest to become CEO provides inside candidates. Handicapping implies that a firm is more likely to pick an insider for the CEO position where insiders are more comparable to each other and less...

A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents...

This paper develops a novel model of agent behavior in organizations in order to compare the efficiency of “open” versus “closed” organizations. Closed organizations “screen” potential agents before admitting them while open organizations do not. Both have the option to “sort”...

A highly acclaimed result in contract theory is that tournaments are superior to piece rate contracts when the agents are risk averse and their production activities are subject to a relatively large common shock. The reason is that tournaments allow the principal to trade insurance for lower...