outside option for a worker: the only way to achieve a level of income exceeding W lies on
the bureaucratic career track and it requires activist service.
As far as the contract design is concerned, the bosses behave as a single entity - the
representative boss. The contract designed by the incumbent boss is offered to every worker
who is not and has never been before an activist.13 Although the boss dictates the terms of the
contract to the activists, he cannot force a worker to enlist as an activist and has to choose the
contract terms in anticipation of known voluntary response from the workers, given the
chosen values of Ta, Tb, and π; and the exogenous wage, W.14 The optimal contract is a
subgame-perfect equilibrium in the boss-activists strategic interaction where the boss is the
prime mover. The contract is life-long. Once written, it is supposed to be non-renegotiable.
However, the contracts offered to successive cohorts of activists may differ.
2.2. Supply of activists
The choice problem facing an individual worker involves a comparison of two life-
time income profiles. The first assumes a permanent stay in the ordinary worker position and
receiving certain income. The second consists of the period of costly activist service of
13 The accuracy of the assumption of no reentry into the ranks of activists depends on the extent of
factional struggle within the ruling party. Swings in the power struggle may let previously purged
activists restart their careers. Thus, for example, almost all surviving victims of the Cultural
Revolution in China (1966-1976) were eventually rehabilitated (Lee 1991).
14 Theoretically, a single boss, who combines political and economic power, could endogenize wage in
the present context. However, the division of responsibility within the ruling bureaucracy makes it
practically impossible to align the contract design by political leaders with wage setting decisions by
production managers (planners), even if the latter belong to the stratum of bosses in terms of my
model. Maxim Boycko et al. (1995) argue that the separation of control rights from cash-flow rights
under centrally-planned economy was the major source of economic inefficiency of the Soviet system.
In the theoretical framework of this paper, it results also in political inefficiency by preventing the
designers of the promotion contracts from controlling wage. This issue is further discussed in Section
2.6.
14