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Self-Selection and the Efficiency of Tournaments

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  • 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, IZA - Institute for the study of labor - IZA - Institute for the Study of Labor)

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 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-00175041.

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Date of creation: Feb 2006
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Handle: RePEc:hal:journl:halshs-00175041

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Related research

Keywords: tournament; performance pay; incentives; sorting; selection; experiment;

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References

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  1. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
  2. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  3. Bellemare, Charles & Shearer, Bruce, 2010. "Sorting, incentives and risk preferences: Evidence from a field experiment," Economics Letters, Elsevier, vol. 108(3), pages 345-348, September.
  4. 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, vol. 120(3), pages 917-962, August.
  5. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
  6. Tor Eriksson & Marie-Claire Villeval, 2004. "Other-Regarding Preferences and Performance Pay – An Experiment on Incentives and Sorting," Post-Print halshs-00175006, HAL.
  7. Green, Jerry & Stokey, Nancy, 1983. "A Comparison of Tournaments and Contracts," Scholarly Articles 3203644, Harvard University Department of Economics.
  8. Lise Vesterlund & Muriel Niederle, 2004. "Do Women shy away from Competition?," Econometric Society 2004 North American Summer Meetings 652, Econometric Society.
  9. 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, vol. 12(2), pages 155-79, April.
  10. Edward Lazear & Ulrike Malmendier & Roberto Weber, 2006. "Sorting, Prices, and Social Preferences," NBER Working Papers 12041, National Bureau of Economic Research, Inc.
  11. 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, vol. 11(4), pages 606-28, October.
  12. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  13. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  14. Edward P. Lazear & Ulrike Malmendier & Roberto A. Weber, 2012. "Sorting in Experiments with Application to Social Preferences," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 136-63, January.
  15. Bohnet, Iris & Kübler, Dorothea, 2000. "Compensating the cooperators: Is sorting in the prisoner's dilemma possible?," SFB 373 Discussion Papers 2001,2, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  16. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, vol. 50(2), pages 268-279, February.
  17. 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.
  18. Christine Harbring & Bernd Irlenbusch, 2005. "Incentives in Tournaments with Endogenous Prize Selection," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(4), pages 636-, December.
  19. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  20. Ronald G. Ehrenberg & Michael L. Bognanno, 1988. "Do Tournaments Have Incentive Effects?," NBER Working Papers 2638, National Bureau of Economic Research, Inc.
  21. 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).
  22. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  23. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August.
  24. Nabanita Datta Gupta & Anders Poulsen & Marie-Claire Villeval, 2005. "Male and Female Competitive Behavior: Experimental," Post-Print halshs-00175039, HAL.
  25. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  26. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  27. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  28. repec:wop:humbsf:2001-2 is not listed on IDEAS
  29. Schotter, Andrew & Weigelt, Keith, 1992. "Asymmetric Tournaments, Equal Opportunity Laws, and Affirmative Action: Some Experimental Results," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 511-39, May.
  30. 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, vol. 10(4), pages 481-497, August.
  31. Hvide, Hans K. & Kristiansen, Eirik G., 2003. "Risk taking in selection contests," Games and Economic Behavior, Elsevier, vol. 42(1), pages 172-179, January.
  32. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
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