The nature of tournaments
This paper characterizes the optimal way for a principal to structure a rank-order tournament in a moral hazard setting (as in Lazear and Rosen in J Polit Econ 89:841–864, 1981). We find that it is often optimal to give rewards to top performers that are smaller in magnitude than corresponding punishments to poor performers. The paper identifies four reasons why the principal might prefer to give larger rewards than punishments: (1) R is small relative to P (where R is risk aversion and P is absolute prudence); (2) the distribution of shocks to output is asymmetric and the asymmetry takes a particular form; (3) the principal faces a limited liability constraint; and (4) there is agent heterogeneity of a particular form.
Unable to display preview. Download preview PDF.
- Baye M.R., Kovenock D., de Vries C.G.: The all-pay auction with complete information. Econ Theory 8, 291–305 (1996)Google Scholar
- Clark D.J., Riis C.: Competition over more than one prize. Am Econ Rev 88, 276–289 (1998)Google Scholar
- Jaramillo, J.E.Q.: Moral Hazard in Teams with Limited Punishments and Multiple Outputs, Mimeo (2004)Google Scholar
- Krishna V., Morgan J.: The winner-take-all principle in small tournaments. Adv Appl Microecon 7, 61–74 (1998)Google Scholar
- Skaperdas S.: Contest success functions. Econ Theory 7, 283–290 (1996)Google Scholar
- Weber R.: Auctions and competitive bidding. In: Young, H.P. (eds) Fair Allocation., pp. 143–170. Providence, American Mathematical Society (1985)Google Scholar