Rank-Order Tournaments as Optimum Labor Contracts

This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.

Preemptive Behavior in Sequential-Move Tournaments with Heterogeneous Agents

Rank-order tournaments are usually modeled simultaneously. However, real tournaments are often sequential. We show that agents’ strategic behavior in sequential-move tournaments significantly differ from the one in simultaneous-move tournaments: In a sequential-move tournament with heterogeneous agents, there may be either a first-mover or a second-mover advantage. Under certain conditions the first acting agent chooses a preemptively high effort so that the following agent gives up. The principal is able to prevent preemptive behavior in equilibrium, but he will not implement first-best efforts although the agents are risk neutral.preemption, tournaments

Pests, plagues, and patents

The paper investigates the interaction between dynamic forms of incentive mechanisms (patent systems) and dynamic forms of problems (adaptations of pests and pathogens). Since biological problems recur, the design of the incentive mechanism must take into consideration: a) the need for investments into R&D that take into account the impermanence of the solution concepts; and b) the impact of this impermanence on the anticipated lifespan of any patent awarded for an innovation. The results indicate that patent systems must be carefully tailored to the nature of the problem under consideration

Sabotage in Contests: A Survey

A contest is a situation in which individuals expend irretrievable resources to win valuable prize(s). ‘Sabotage’ is a deliberate and costly act of damaging a rival’s' likelihood of winning the contest. Sabotage can be observed in, e.g., sports, war, promotion tournaments, political or marketing campaigns. In this article, we provide a model and various perspectives on such sabotage activities and review the economics literature analyzing the act of sabotage in contests. We discuss the theories and evidence highlighting the means of sabotage, why sabotage occurs, and the effects of sabotage on individual players and on overall welfare, along with possible mechanisms to reduce sabotage. We note that most sabotage activities are aimed at the ablest player, the possibility of sabotage reduces productive effort exerted by the players, and sabotage may lessen the effectiveness of public policies, such as affirmative action, or information revelation in contests. We discuss various policies that a designer may employ to counteract sabotage activities. We conclude by pointing out some areas of future research

MORAL HAZARD IN TEAMS WITH LIMITED PUNISHMENTS AND MULTIPLE OUTPUTS

This paper studies incentive provision with limited punishments. It revisits the moral hazard problem with risk neutral parties and solves for optimal compensation schemes in situations where agents' participation is implied by a limited liability constraint. Providing minimum cost incentives to teams or individuals requires awarding high bonuses only when extreme performances are observed. Even when the first-best is attainable, the principal may prefer to induce more (or less) effort than it is sociably desirable because she only cares about the marginal cost of motivation. With positive production externalities joint bonuses are optimal. With limited liability on the principal's side, the optimal scheme becomes a tournament---even in the absence of externalities. The paper also looks at conditions that favor one incentive scheme over another when agents adapt their strategies as information becomes available.

The allocation of rewards in athletic contests

Similar to most top-tier matches in professional basketball, baseball and soccer, high-level competitions in individualistic sports, such as the tennis tournaments of Wimble-don and Flushing Meadows, the golf tournaments of Augusta and St. Andrews, as well as the marathons of New York and London attract not only thousands of spectators, but also a TV audience of millions of fans. Moreover, these (and other) individualistic sports have recently received increased attention also from economists trying to test a number of hypotheses that can be derived from "tournament theory" or - as a synonym - from "contest theory". The chapter is structured as follows: We first provide a brief description of the development of prize money levels and structures in the three different individual sports men-tioned in the previous paragraph (and, consequently, athletes' incomes over the last years (section 2). We then summarize the basic insights and the core predictions of tour-nament/contest theory (section 3) and review the available literature on the incentive effects of tournament pay systems in athletic contests (section 4). Finally, section 5 concludes and raises some of the questions that have not been answered yet and that should, therefore, be dealt with in future research.

Emotions and the Optimality of Unfair Tournaments

We introduce a concept of emotions that emerge when workers compare their own performance with the performances of co-workers. Assuming heterogeneity among the workers the interplay of emotions and incentives is analyzed within the framework of rank-order tournaments which are frequently used in practice. Tournaments seem to be an appropriate starting point for this concept because the main idea of a tournament is inducing incentives by making workers compare themselves with their opponents. We differentiate between exogenous and endogenous tournament prizes and identify certain conditions under which the employer benefits from emotional workers. In this case, he clearly prefers unfair to fair tournaments. Furthermore, the concept of emotions is used to explain the puzzling findings on the oversupply of effort in experimental tournaments.anger; emotions; pride; tournaments

Knowing the gap - intermediate information in tournaments

Intermediate information is often available to competitors in dynamic tournaments. We develop two simple tournament models with two stages: one with intermediate information on subjects’ relative positions after the first stage, one without. In our models, equilibrium behavior in both stages is not changed by intermediate information. We test our formal analysis using data from laboratory experiments. We find no difference between average first and second stage efforts. With intermediate information, however, subjects adjust their effort to a higher extent. Subjects who lead tend to lower their second stage effort, subjects who lag still try to win the tournament. Overall, intermediate information does not endanger the effectiveness of rank-order tournaments: incentives do neither break down nor does a rat race arise. We also briefly investigate costly intermediate information