Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2008/23: Tournaments with prize-setting agents

Kristoffer W. Eriksen (), Ola Kvaløy () and Trond E. Olsen ()
Additional contact information
Kristoffer W. Eriksen: Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger, Postal: University of Stavanger, Department of Business Administration, Norwegian School of Hotel Management, 4036 Stavanger, Norway
Ola Kvaløy: Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger, Postal: University of Stavanger, Department of Business Administration, Norwegian School of Hotel Management, 4036 Stavanger, Norway
Trond E. Olsen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: C30

31 pages, October 17, 2008

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