Too big to succeed? Overstaffing in firms

Abstract

Overstaffing appears to be a source of significant inefficiencies in organizations, but there is little economic theory that informs us why. We extend the canonical Lazear-Rosen tournament model to a dynamic setting that yields overstaffing at the managerial level. Overstaffing can be optimal in first best, without moral hazard, if the redundant manager gains experience and increases the firm's future productivity. In second best, overstaffing can be a way to provide incentives to young workers without "overpaying" middle-aged workers, a point that is illustrated with several examples from real world organizations. The model may offer some independent interest by integrating a generational structure into a tournament model.An [other] important problem with promotion-based reward systems is that they require organizational growth to feed the reward system (Baker et al., 1988, p. 600).