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Bonuses and Promotion Tournaments: Theory and Evidence

Author

Listed:
  • Emre Ekinci
  • Antti Kauhanen
  • Michael Waldman

Abstract

Standard models of promotion tournaments do not distinguish between wages and bonuses and thus cannot explain variation in the use of bonuses. We combine classic and market-based tournament theories to develop a model in which wages and bonuses serve distinctly different roles. We use this model to derive testable predictions which we test employing both a single firm data set and a data set encompassing a large segment of the Finnish economy. Our empirical analysis supports the testable predictions and shows that our theoretical approach better matches the data than alternative theories of bonus determination based on arguments already in the literature.

Suggested Citation

  • Emre Ekinci & Antti Kauhanen & Michael Waldman, 2019. "Bonuses and Promotion Tournaments: Theory and Evidence," The Economic Journal, Royal Economic Society, vol. 129(622), pages 2342-2389.
    • Handle: RePEc:oup:econjl:v:129:y:2019:i:622:p:2342-2389.
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    File URL: http://hdl.handle.net/10.1111/ecoj.12631
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    Citations

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    Cited by:

    1. Huang, Xinpeng & Meng, Fanshi, 2023. "Digital finance mitigation of ' resource curse ' effect: Evidence from resource-based cities in China," Resources Policy, Elsevier, vol. 83(C).
    2. Oliver Gürtler & Lennart Struth, 2021. "Do Workers Benefit from Wage Transparency Rules?," ECONtribute Discussion Papers Series 105, University of Bonn and University of Cologne, Germany.
    3. Ekinci, Emre, 2022. "Employee entrepreneurship and signaling role of corporate venturing decisions," Labour Economics, Elsevier, vol. 79(C).
    4. Ori Zax, 2020. "Human capital acquisition as a competitive response to the promotion distortion," Metroeconomica, Wiley Blackwell, vol. 71(3), pages 496-509, July.
    5. John G Sessions & John D Skatun, 2019. "A bonus given: noise, effort and efficiency in a flat hierarchy," Economics Bulletin, AccessEcon, vol. 39(4), pages 2527-2532.
    6. Dunhong Jin & Thomas Noe, 2022. "The Golden Mean: The Risk‐Mitigating Effect of Combining Tournament Rewards with High‐Powered Incentives," Journal of Finance, American Finance Association, vol. 77(5), pages 2907-2947, October.
    7. David Wettstein & Ori Zax, 2018. "Promotion Policies of Workers who Observe their Ability," Economics Bulletin, AccessEcon, vol. 38(4), pages 2509-2514.

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