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Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence

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  • Steven Wu
  • Brian Roe

Abstract

Using experimental economics, we compare the efficiency and welfare effects of tournaments and fixed performance contracts. Our subjects (agents) were generally better off under fixed performance contracts, but the advantage of the fixed performance contract disappears if the relative magnitude of the standard deviation of the common shock exceeds a critical value. Efficiency wise, agents tend to exert higher effort under fixed performance contracts, on average. Additionally, an increase in the common shock standard deviation appeared to be associated with lower effort under tournaments. Our results shed light on the potential impact of legislative proposals to ban tournament contracts. Copyright 2005, Oxford University Press.

Suggested Citation

  • Steven Wu & Brian Roe, 2005. "Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 130-146.
    • Handle: RePEc:oup:ajagec:v:87:y:2005:i:1:p:130-146
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    File URL: http://hdl.handle.net/10.1111/j.0002-9092.2005.00707.x
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    Citations

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    Cited by:

    1. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    2. Zhen Wang & Tomislav Vukina, 2017. "Welfare effects of payment truncation in piece rate tournaments," Journal of Economics, Springer, vol. 120(3), pages 219-249, April.
    3. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute of Labor Economics (IZA), pages 302-302, October.
    4. Niladri Syam & James Hess & Ying Yang, 2013. "Sales contests versus quotas with imbalanced territories," Marketing Letters, Springer, vol. 24(3), pages 229-244, September.
    5. Wu, Steven Y., 2006. "Contract theory and agricultural policy analysis: a discussion and survey of recent developments," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(4), pages 1-20, December.
    6. Rachael Goodhue & Leo Simon, 2016. "Agricultural contracts, adverse selection, and multiple inputs," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 4(1), pages 1-33, December.
    7. Mahdi, Shireen, 2012. "Quality contingent contracts : evidence from Tanzania's coffee market," Policy Research Working Paper Series 6171, The World Bank.
    8. Sheremeta, Roman M. & Wu, Steven Y., 2012. "Testing Canonical Tournament Theory: On the Impact of Risk, Social Preferences and Utility Structure," IZA Discussion Papers 6304, Institute of Labor Economics (IZA).
    9. Marinakis, Kosmas & Tsoulouhas, Theofanis, 2013. "Are tournaments optimal over piece rates under limited liability for the principal?," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 223-237.
    10. Wu, Steven Y. & Roe, Brian E. & Sporleder, Thomas L. & Nazaryan, Natalie, 2005. "An Experimental Investigation Of Alternative Incentive Schemes With Heterogeneous Agents," Working Papers 28318, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    11. Kosmas Marinakis & Theofanis Tsoulouhas, 2012. "A comparison of cardinal tournaments and piece rate contracts with liquidity constrained agents," Journal of Economics, Springer, vol. 105(2), pages 161-190, March.
    12. Theofanis Tsoulouhas, 2017. "Do tournaments solve the adverse selection problem?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 675-690, September.
    13. Wu, Steven Y. & Nazaryan, Natalie & Roe, Brian E. & Sporleder, Thomas L., 2004. "Behavioral and Welfare Effects of Tournaments and Fixed Performance Standard Contracts with Heterogeneous Agents: Some Experimental Evidence," 2004 Annual meeting, August 1-4, Denver, CO 20103, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    14. Agranov, Marina & Tergiman, Chloe, 2013. "Incentives and compensation schemes: An experimental study," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 238-247.
    15. Petra Nieken, 2010. "On the Choice of Risk and Effort in Tournaments—Experimental Evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 811-840, September.

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