Noisy and Subjective Performance Measure in Promotion Tournaments

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.