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This paper studies the assignment of people to projects over time in a model with private information. The combination of risk neutrality with incomplete contracts that restrict the ability of an agent to report on interim states is a force for long-term assignments. More generally, however, rotating agents can be valuable because it conceals information from agents, which mitigates incentive constraints. With complete contracts that communicate interim states, rotation allows for even more concealement possibilities and better targeted incentives. Furthermore, it allows for the reporting of interim shocks at no cost to the principal. Properties of the production technology are also shown to matter. Substitutability of intertemporal effort is a force for long-term assignments while coordination with Nash equilibrium strategies is a force for job rotation. JEL Classification: D82, L23

Starting from the separation between formal and real authority, the paper considers a hierarchical relation where delegation of control can be used as an incentive mechanism. It shows that delegation is optimal when parties ’ interests are neither too divergent nor too close. In that case superiors do not need to monitor too closely, curbing the subordinates’ initiative and subordinates have no incentives to free ride on the superiors ’ information. The analysis is then extended to a multiperiod setting. If subordinates acquire expertise on the job (learning by doing), effort has the nature of a specific investment whose intrinsic value is higher the longer the subordinate’s working life. Therefore, a policy of gradual delegation is possible, where agents accept weaker incentives at the beginning of their career, requiring stronger incentives over time as the value of their knowledge diminishes.

The U.S. distribution of labor earnings is highly skewed to the right. Roughly, the lowest 50 percent of U.S. households, as measured by individual labor earnings, make 10 percent of total labor earnings. The next lowest 30 percent earn approximately 30 percent and highest 10 percent make 40 percent. 1 Earnings are also related to a person’s position within a firm and employment at a particular firm. Within a firm earnings tend to be associated with rank. The higher is an individual’s authority and control, the higher is his compensation. The most extreme manifestation of this is the enormous pay of the top executives of large firms. In 1996 the median pay of chief executive officers of companies in the S&P 500 index was nearly 2.5 million dollars (Murphy 1999). Across firms earnings tend to increase with firm size. This is particularly true for executives. The elasticity of executive pay with respect to firm size is in the range of 0.20 to 0.35 (Rosen 1992). Earnings for workers also increase with firm size. This is the well-documented wage-size premium (Brown and Medoff [1989] and Oi and Idson [1999]). The standard neo-classical production function, where output equals a function of aggregate labor and aggregate capital, cannot simultaneously account for these facts. It can generate an unequal distribution of earnings, if some people’s labor is more efficient than others. But it has only one economywide firm so it is necessarily silent on any relationship between earnings and firm assignments. And even with respect to the distribution of earnings, the The author would like to thank Andreas Hornstein, Tom Humphrey, Pierre Sarte, and John Weinberg for helpful comments. The views expressed in this article do not necessarily represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. 1 These are 1998 numbers taken from the Survey of Consumer Finances as reported by

This mechanism design paper studies the assignment of people to projects over time. Inability to communicate interim shocks is a force for long-term assignments, though exceptions exist for high risk aversion. In contrast, costless reporting of interim shocks makes switching powerful for virtually all environments. Switching elicits honest reports and mitigates incentive constraints allowing, in particular, bene…cial concealment of project quality. Properties of the production technology are also shown to matter. Substitutability of intertemporal e¤ort is a force for long-term assignments while complementarity with Nash equilibrium strategies is a force for job rotation.

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IT and work organisation: beyond technological complementarity and social interaction