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Seoul Journal of Economics - Vol. 25 , No. 2
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Seoul Journal of Economics - Vol. 25, No. 2, pp. 207-221
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 May 2012
Received 01 Dec 2011 Revised 25 Jan 2012 Accepted 23 Feb 2012

Noisy and Subjective Performance Measure in Promotion Tournaments
Illoong Kwon
Assistant Professor, Graduate School of Public Administration, Seoul National University, 599 Gwanak-ro, Gwanak-gu, Seoul 151-742, Korea, Tel: ＋82-2-880-8551, Fax: ＋82-2-882-3998 (ilkwon@snu.ac.kr)

JEL Classification: D82, D86, M52

Abstract

This paper considers both incentive and sorting effects of a promotion tournament, and analyzes the optimal degree of uncertainty in the agents' performance measure. In a subjective promotion tournament where the winner is determined by the principal's belief about the agents' ability, this paper shows that a noisy performance measure can have a positive incentive effect and a negative sorting effect. Therefore, it can be optimal for the principal to intentionally choose a noisy performance measure.

Keywords: Noisy performance measure, Subjective tournament, Sorting
Acknowledgments

I would like to thank Michael Waldman, Young-Ro Yoon, and the participants of a seminar at Seoul National Univeristy, and 2011 Conference for Tournaments, Contests, and Relative Performance for helpful comments and suggestions. All remaining errors are mine.

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