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Optimal Inequality/Optimal Incentives: Evidence from a Tournament

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Richard B. Freeman

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Abstract

This paper examines performance in a tournament setting with different levels of inequality in rewards and different provision of information about individual's skill at the task prior to the tournament. We find that that total tournament output depends on inequality according to an inverse U shaped function: We reward subjects based on the number of mazes they can solve, and the number of solved mazes is lowest when payments are independent of the participants' performance; rises to a maximum at a medium level of inequality; then falls at the highest level of inequality. These results are strongest when participants know the number of mazes they solved relative to others in a pre-tournament round and thus can judge their likely success in the tournament. Finally, we find that cheating/fudging on the experiment responds to the level of inequality and information about relative positions. Our results support a model of optimal allocation of prizes in tournaments that postulate convex cost of effort functions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12588.

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Date of creation: Oct 2006
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Handle: RePEc:nbr:nberwo:12588

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Find related papers by JEL classification:
A0 - General Economics and Teaching - - General
H0 - Public Economics - - General
J0 - Labor and Demographic Economics - - General

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  6. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leuven, Edwin & Oosterbeek, Hessel & Sonnemans, Joep & van der Klaauw, Bas, 2008. "Incentives versus Sorting in Tournaments: Evidence from a Field Experiment," IZA Discussion Papers 3326, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Freeman, Richard B. & Gelber, Alexander M., 2008. "Prize Structure and Information in Tournaments: Experimental Evidence," MPRA Paper 12156, University Library of Munich, Germany. [Downloadable!]
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