Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73884
Authors: 
Dutcher, E. Glenn
Balafoutas, Loukas
Lindner, Florian
Ryvkin, Dmitry
Sutter, Matthias
Year of Publication: 
2013
Series/Report no.: 
Working Papers in Economics and Statistics 2013-08
Abstract: 
Managers often use tournaments which motivate workers to compete for the top, compete to avoid the bottom, or both. In this paper we compare the effectiveness and efficiency of the corresponding incentive schemes. To do so, we utilize optimal contracts in a principal-agent setting, using a Lazear-Rosen type model that predicts equal effort and efficiency levels for the three mechanisms with the appropriate distribution of prizes. We test the model's predictions in a laboratory experiment and find that a mechanism which incorporates both competition for the top and away from the bottom produces the highest effort from agents, especially in contests of a relatively larger size. Avoiding being last is shown to produce the lowest variance of effort, be more effective and, in larger contests, more efficient than competing for the top. Finally, we show that behavior in all mechanisms is consistent with basic directional and reinforcement learning.
Subjects: 
tournament
reward
punishment
promotion
firing
contract
experiment
learning
JEL: 
M52
J33
J24
D24
C90
Document Type: 
Working Paper

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