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Effort Self-Selection and the Efficiency of Tournaments

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Author Info

  • Tor Eriksson

    ()
    (Department of economics - University of Aarhus)

  • Sabrina Teyssier

    ()
    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

  • Marie-Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

Abstract

When exogenously imposed, rank-order tournaments have incentive properties but their overall efficiency is reduced by a high variance in performance (Bull, Schotter, and Weigelt 1987). However, since the efficiency of performance-related pay is attributable both to its incentive effect and to its selection effect among employees (Lazear, 2000), it is important to investigate the ex ante sorting effect of tournaments. This paper reports results from an experiment analyzing whether allowing subjects to self-select into different payment schemes helps in reducing the variability of performance in tournaments. We show that when the subjects choose to enter a tournament, the average effort is higher and the between-subject variance is substantially lower than when the same payment scheme is imposed. Mainly based on the degree of risk aversion, sorting is efficiency-enhancing since it increases the homogeneity of the contestants. We suggest that the flexibility of the labor market is an important condition for a higher efficiency of relative performance pay.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00142876.

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Date of creation: 2006
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Handle: RePEc:hal:journl:halshs-00142876

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00142876/en/
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Related research

Keywords: experiment ; Incentives ; performance pay ; selection ; selection ; tournament;

References

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  1. Jerry R. Green & Nancy L. Stokey, 1982. "A Comparison of Tournaments and Contracts," NBER Working Papers 0840, National Bureau of Economic Research, Inc.
  2. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1307-24, December.
  3. Lise Vesterlund & Muriel Niederle, 2004. "Do Women shy away from Competition?," Econometric Society 2004 North American Summer Meetings, Econometric Society 652, Econometric Society.
  4. Datta Gupta, Nabanita & Poulsen, Anders & Villeval, Marie Claire, 2005. "Male and Female Competitive Behavior: Experimental Evidence," IZA Discussion Papers 1833, Institute for the Study of Labor (IZA).
  5. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Asymmetric Tournaments, Equal Opportunity Laws and Affirmative Action: Some Experimental Results," Working Papers, C.V. Starr Center for Applied Economics, New York University 87-33, C.V. Starr Center for Applied Economics, New York University.
  6. Frans van Dijk & Joep Sonnemans & Frans van Winden, 1998. "Incentive Systems in a Real Effort Experiment," Tinbergen Institute Discussion Papers 98-023/1, Tinbergen Institute.
  7. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 12(2), pages 155-79, April.
  8. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 17(2), pages 262-80, April.
  9. Hvide, Hans K. & Kristiansen, Eirik G., 2003. "Risk taking in selection contests," Games and Economic Behavior, Elsevier, Elsevier, vol. 42(1), pages 172-179, January.
  10. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1985. "Tournaments and Piece Rates: An Experimental Study," Working Papers, C.V. Starr Center for Applied Economics, New York University 85-21, C.V. Starr Center for Applied Economics, New York University.
  11. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, Elsevier, vol. 10(4), pages 443-464, August.
  12. Edward Lazear & Ulrike Malmendier & Roberto Weber, 2006. "Sorting, Prices, and Social Preferences," NBER Working Papers 12041, National Bureau of Economic Research, Inc.
  13. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  14. Nabanita Datta Gupta & Anders Poulsen & Marie-Claire Villeval, 2005. "Male and Female Competitive Behavior: Experimental," Post-Print, HAL halshs-00175039, HAL.
  15. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1644-1655, December.
  16. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 2(1), pages 27-56, January.
  17. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, INFORMS, vol. 50(2), pages 268-279, February.
  18. Eriksson, Tor & Villeval, Marie Claire, 2004. "Other-Regarding Preferences and Performance Pay – An Experiment on Incentives and Sorting," IZA Discussion Papers 1191, Institute for the Study of Labor (IZA).
  19. Vandegrift, Donald & Brown, Paul, 2003. "Task difficulty, incentive effects, and the selection of high-variance strategies: an experimental examination of tournament behavior," Labour Economics, Elsevier, Elsevier, vol. 10(4), pages 481-497, August.
  20. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 561-80, June.
  21. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(2), pages 290-315, April.
  22. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 314-41, June.
  23. Ronald G. Ehrenberg & Michael L. Bognanno, 1990. "The incentive effects of tournaments revisited: Evidence from the European PGA tour," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 74-88, February.
  24. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 917-962, August.
  25. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(3), pages 573-605, June.
  26. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 11(4), pages 606-28, October.
  27. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  28. Harbring, Christine & Irlenbusch, Bernd, 2004. "Incentives in Tournaments with Endogenous Prize Selection," IZA Discussion Papers 1340, Institute for the Study of Labor (IZA).
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Citations

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Cited by:
  1. Leuven, Edwin & Oosterbeek, Hessel & Sonnemans, Joep & van der Klaauw, Bas, 2008. "Incentives Versus Sorting in Tournaments: Evidence from a Field Experiment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6670, C.E.P.R. Discussion Papers.
  2. Ertaç, Seda & Hortaçsu, Ali & Roberts, James W., 2011. "Entry into auctions: An experimental analysis," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(2), pages 168-178, March.

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