How can principals incentivize agents’ efforts while maintaining personnel flexibility? We propose a two-stage mechanism called the promotion club ”: the principal commits to first select a subset of best-performing agents into a club, and then promotes one from within this club based on the principal’s personal, performance-independent discretions. Promotion club outperforms tournament in both efforts and personnel flexibility when there are many homogenous agents, and when intra-crony competitions are strong. We use promotion data of officials in hierarchical governments to validate the existence of promotion clubs in real life organizations. The observed regional and hierarchical variations corroborate model predictions.
Chen Shuo