We study the dynamics of a work group whose members value not only compensa
tion, but also having a high status relative to their peers. Compensation t
akes the form of a fixed salary plus a bonus based on group performance. St
atus is determined both by contributing to group output and by non-producti
ve, social activities which we call "politics". Group members allocate thei
r time between working and non-productive status enhancement, trying to max
imize the combined utility from compensation and status rank.
We show that status competition based on merit can push group members to wo
rk hard. However, if status can also be achieved through political maneuver
ing, it can lead to lower overall performance. Moreover, group performance
may fluctuate and be unstable over time if the results of effort are noisy
or if shared ranks are not allowed in the group. These results help to clar
ify the question of whether status competition enhances group performance b
y pushing group members to work harder, or retards it by causing unproducti
ve behavior. They also suggest ways through which a firm can influence the
effects of status competition on overall performance. (C) 2000 Elsevier Sci
ence B.V. All rights reserved. JEL classification: J33; J44; M12; M14.