One puzzling feature of domestic private equity (PE) funds in emerging markets is that such funds often have a “short fuse”, i.e., a much shorter lifespan than their developed market counterparts. Based on a simple agency model, we propose an explanation for this puzzle. We show that, under a long fuse, PE managers have incentives to game performance-based compensation schemes by opportunistically timing investments and burning money when early investments fail. Shortening the fuse restricts timing opportunism, but alleviates money-burning incentives only if managerial compensation is sufficiently concavified or the contract stipulates substantial investors' hurdle returns. Both of these options can force managers to concede rents to investors. Thus, managers face a tradeoff between rents and agency costs. In emerging markets, where agency costs are high, managers use a short fuse with incentive compatible compensation schemes to minimize agency costs. In contrast, in developed markets, where agency costs are low, managers use a long fuse to preserve rents. Based on these results, we further draw predictions on fund performance, managerial behavior, and investor rents for both long-fused developed-market funds and short-fused emerging-market funds. We also predict that, when institutional infrastructure in emerging markets improves and when domestic PE managers in emerging markets gain more experience, domestic PE funds in emerging markets will adopt the long-lifespan PE contracts typical in developed markets.

Uncompetitive contests for grades, promotions, retention, and job assignments, which feature lax standards and limited candidate pools, are often criticized for being unmeritocratic. We show that when contestants are strategic, lax standards and exclusivity can make selection more meritocratic. When many contestants compete for a few promotions, strategic contestants adopt high-risk strategies. Risk-taking reduces the correlation between performance and ability. Through reducing the effects of risk-taking, “Peter principle” promotion policies, which entail promoting some contestants that are unlikely to be worthy, can increase the overall correlation between selection and ability and thus further meritocracy.

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at the division level rather than the firm level can boost employees’ effort. Our results are also consistent with personnel policies that feature egalitarian pay systems and dismissal of worst-performing employees.