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Positive Self-Image In Tournaments

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  • Luís Santos-Pinto

Abstract

This article analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments. Each worker overestimates his productivity but is aware of the bias in his opponent's self-assessment. The manager of the firm, on the other hand, correctly assesses workers' productivities and self-beliefs when setting tournament prizes. The article shows that, under a variety of circumstances, firms can benefit from worker positive self-image. The article also shows that worker positive self-image can improve welfare in tournaments. In contrast, workers' utility declines due to their own misguided choices. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 51 (2010)
Issue (Month): 2 (05)
Pages: 475-496

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Handle: RePEc:ier:iecrev:v:51:y:2010:i:2:p:475-496

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  1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  2. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  3. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management.
  4. Munetomo Ando, 2004. "Overconfidence in Economic Contests," Econometric Society 2004 Far Eastern Meetings 708, Econometric Society.
  5. Malmendier, Ulrike M. & Tate, Geoffrey, 2003. "Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction," Research Papers 1798, Stanford University, Graduate School of Business.
  6. Winston Koh, 1992. "A note on modelling tournaments," Journal of Economics, Springer, vol. 55(3), pages 297-308, October.
  7. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  8. Landier, Augustin & Thesmar, David, 2003. "Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence," CEPR Discussion Papers 3971, C.E.P.R. Discussion Papers.
  9. Menkhoff, Lukas & Schmidt, Ulrich & Brozynski, Torsten, 2006. "The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence," European Economic Review, Elsevier, vol. 50(7), pages 1753-1766, October.
  10. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
  11. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
  12. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  13. Thomas Oberlechner & Carol Osler, 2009. "Overconfidence in Currency Markets," Working Papers 02, Brandeis University, Department of Economics and International Businesss School.
  14. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
  15. Santos-Pinto, Luís & Park, Young-Joon, 2004. "Forecasts of relative performance in tournaments: evidence from the field," MPRA Paper 3144, University Library of Munich, Germany, revised 22 Mar 2007.
  16. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  17. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
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Cited by:
  1. Sandra Ludwig & Julia Nafziger, 2011. "Beliefs about overconfidence," Theory and Decision, Springer, vol. 70(4), pages 475-500, April.
  2. Leonidas Enrique de la Rosa, 2007. "Overconfidence and Moral Hazard," Economics Working Papers 2007-08, School of Economics and Management, University of Aarhus.
  3. Ludwig, Sandra & Wichardt, Philipp C. & Wickhorst, Hanke, 2011. "Overconfidence can improve an agent's relative and absolute performance in contests," Economics Letters, Elsevier, vol. 110(3), pages 193-196, March.
  4. Sandra Ludwig & Julia Nafziger, 2007. "Do You Know That I Am Biased? An Experiment," Bonn Econ Discussion Papers bgse11_2007, University of Bonn, Germany.

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