DP637 | Biased Contests and Moral Hazard: Implications for Career Profiles

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Publication Date

29/02/1992

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Abstract

We study the design of a sequence of two contests between a pair of identical risk averse employees whose effort choices are private information. It is optimal for the organization to `bias' the second contest in favor of the early winner - the reduction in second-period incentives is outweighed by the increase in first-period incentives. Thus, even though first-period success reflects only transitory shocks and not ability, it is efficient to structure the contests so these shocks have persistent effects on employees' careers.