Herbertz, Claus Ortwin (2012) Compensation, Favoritism, and Adverse Selection - Essays on Managerial Incentives in Firms. PhD thesis, Universität zu Köln.
In this thesis, we investigate how monetary incentive schemes influence promotion and distribution decisions in the presence of favoritism. In chapter 2, we theoretically analyze the relationship between managerial incentives and promotion quality in the presence of favoritism, stating that incentives crowd out favoritism and lead to better promotion decisions. Testing this hypothesis empirically, we find a positive relationship between the use of managerial incentives and promotion quality in German firms. In chapter 3, we point out a drawback of high promotion prizes in tournaments with favoritism: In the presence of favoritism supervisors gain utility by awarding the tournament prize to their favored agent and are less likely to promote the more able agent. For large prizes, this effect outweighs the incentive effect of the tournament prize. Consequently, the agents' effort declines in the prize. In chapter 4, we experimentally investigate favoritism-induced selection effects by forming 3-person groups with two friends and an anonymous player in a distribution game. Anonymous players avoid the distribution game, fearing harmful collaborations of the befriended participants. Incentives for decision-makers partially crowd out favoritism and the anonymous player enters the distribution game. Chapter 5 deals with a methodological problem in experimental economics. It is a common practice to conduct experimental sessions, evaluate the resulting data and conduct further sessions if no significant results are attained. We illustrate that this approach leads to a Type I Error inflation and make suggestions for better experimental planning.
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