American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits
American Economic Journal: Microeconomics
vol. 8,
no. 3, August 2016
(pp. 1–38)
Abstract
How can a principal (employer or voter) induce an agent (worker or politician) to choose the "right" actions if risky actions reveal the agent's decision making competence and only dismissal can be used as an incentive instrument? We first show that if the principal can commit to a replacement strategy, then optimal mechanisms involve either (i) a probationary period and then indefinite tenure, or (ii) dismissing poorly performing agents but also randomly replacing agents who take nonrevealing actions. When the principal cannot commit, incentives can be improved by imposing term limits on agents.Citation
Aghion, Philippe, and Matthew O. Jackson. 2016. "Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits." American Economic Journal: Microeconomics, 8 (3): 1–38. DOI: 10.1257/mic.20150083Additional Materials
JEL Classification
- D72 Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- D82 Asymmetric and Private Information; Mechanism Design
- M51 Personnel Economics: Firm Employment Decisions; Promotions
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