Title: Sales Contests, Promotion Decisions and Heterogeneous Risk
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.
Publication Year: 2007
Publication Date: 2007-10-30
Language: en
Type: article
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