Abstract
AbstractThis paper examines a general model of sales contests in which agents have heterogeneous attitudes toward 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. Copyright © 2008 John Wiley & Sons, Ltd.
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