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 as to why. We extend the canonical Lazear-Rosen tournament model to show that overstaffing at the managerial level can occur in a profit-maximizing firm with promotion-based incentives. Overstaffing can be an optimal way to provide incentives to young workers under moral hazard. Overstaffing can be optimal even in first best, without moral hazard, if the redundant manager gains experience and increases future productivity of the firm. The paper shows that an extension of the standard tournament model can be used to explain bureaucratic waste. The model may have some independent interest by integrating a generational structure into a tournament model.