Competition for Talent Under Performance Manipulation

We study the effects of introducing competition for CEOs, assuming that the talent of CEOs is not observable and that they can misreport their performance. Without competition for talent, firms maximize their profits by offering inefficiently low-powered incentive contracts. Competition for talent removes those inefficiencies, but it leads to excessively high-powered incentive contracts, causing efficiency losses that can be more severe than the inefficiencies that competition mitigates. If misreporting is not a concern, however, then competition for talent has unambiguously positive effects on efficiency.