Economic Theory

, Volume 51, Issue 2, pp 289–313 | Cite as

The nature of tournaments

Symposium

Abstract

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.

Keywords

Prizes Tournaments 

JEL Classification

L22 

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Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Massachusetts Institute of TechnologyCambridgeUSA
  2. 2.University of ChicagoChicagoUSA
  3. 3.NBERCambridgeUSA

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