Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Kristoffer W. Eriksen
Tournaments with prize-setting agents
(), Ola Kvaløy
() and Trond E. Olsen
Abstract: In many tournaments it is the contestants themselves who
determine reward allocation. Labor-union members bargain over wage
distribution, and many firms allow self-managed teams to freely determine
internal resource allocation, incentive structure, and division of labour.
We analyze, and test experimentally, a rank-order tournament where
heterogenous agents determine the spread between winner prize and looser
prize. We investigate the relationship between prize spread, uncertainty
(i.e. noise between e€ort and performance), heterogeneity and effort. The
paper challenges well-known results from tournament theory. We find that a
large prize spread is associated with low degree of uncertainty and high
degree of heterogeneity, and that heterogeneity triggers effort. By and
large, our real-effort experiment supports the theoretical predictions.
Keywords: Rank-order tournament; prize spread; ability-difference; (follow links to similar papers)
JEL-Codes: C30; (follow links to similar papers)
31 pages, October 17, 2008
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