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The Value of Commitment in Contests and Tournaments when Observation is Costly

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Author Info
Felix Várdy (International Monetary Fund)
John Morgan (Haas School of Business & Department of Economics, UC Berkeley)

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Abstract

We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader's behavior. In a contest, the follower can pay to observe the leader's effort but cannot observe the effectiveness of that effort. In a tournament, the follower can pay to observe the effectiveness of the leader's effort but not the effort itself. We show that this distinction matters significantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are sufficiently small.

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Publisher Info
Paper provided by EconWPA in its series Public Economics with number 0504005.

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Length: 33 pages
Date of creation: 14 Apr 2005
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Handle: RePEc:wpa:wuwppe:0504005

Note: Type of Document - pdf; pages: 33
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Related research
Keywords: Contests; Tournaments; Rent-Seeking; Commitment; Costly Leader Games;

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Find related papers by JEL classification:
H10 - Public Economics - - Structure and Scope of Government - - - General

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References listed on IDEAS
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. Edward P. Lazear & Sherwin Rosen, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Michael R. Baye & Onsong Shin, 1999. "Strategic Behavior in Contests: Comment," American Economic Review, American Economic Association, vol. 89(3), pages 691-693, June. [Downloadable!] (restricted)
  3. Avinash Dixit, 1999. "Strategic Behavior in Contests: Reply," American Economic Review, American Economic Association, vol. 89(3), pages 694-694, June. [Downloadable!] (restricted)
  4. Baik, Kyung H & Shogren, Jason F, 1992. "Strategic Behavior in Contests: Comment," American Economic Review, American Economic Association, vol. 82(1), pages 359-62, March. [Downloadable!] (restricted)
  5. Morgan, John, 2003. " Sequential Contests," Public Choice, Springer, vol. 116(1-2), pages 1-18, July. [Downloadable!] (restricted)
  6. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. van Damme, Eric & Hurkens, Sjaak, 1997. "Games with Imperfectly Observable Commitment," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 282-308, October. [Downloadable!] (restricted)
  8. Huck, Steffen & Muller, Wieland, 2000. "Perfect versus Imperfect Observability--An Experimental Test of Bagwell's Result," Games and Economic Behavior, Elsevier, vol. 31(2), pages 174-190, May. [Downloadable!] (restricted)
    Other versions:
  9. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December. [Downloadable!] (restricted)
  10. Morgan, John & Sefton, Martin, 2000. "Funding Public Goods with Lotteries: Experimental Evidence," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 785-810, October.
  11. Baye, Michael R & Kovenock, Dan & de Vries, Casper G, 1994. " The Solution to the Tullock Rent-Seeking Game When R Is Greater Than 2: Mixed-Strategy Equilibria and Mean Dissipation Rates," Public Choice, Springer, vol. 81(3-4), pages 363-80, December.
  12. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-90, September. [Downloadable!] (restricted)
  13. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
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  14. Giovanni Maggi, 1999. "The Value of Commitment with Imperfect Observability and Private Information," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 555-574, Winter. [Downloadable!] (restricted)
  15. Gradstein, Mark & Konrad, Kai A, 1999. "Orchestrating Rent Seeking Contests," Economic Journal, Royal Economic Society, vol. 109(458), pages 536-45, October. [Downloadable!] (restricted)
  16. Snyder, James M, 1989. "Election Goals and the Allocation of Campaign Resources," Econometrica, Econometric Society, vol. 57(3), pages 637-60, May. [Downloadable!] (restricted)
  17. Morgan, John, 2000. "Financing Public Goods by Means of Lotteries," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 761-84, October.
  18. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May. [Downloadable!] (restricted)
  19. Baye, Michael R. & Hoppe, Heidrun C., 2003. "The strategic equivalence of rent-seeking, innovation, and patent-race games," Games and Economic Behavior, Elsevier, vol. 44(2), pages 217-226, August. [Downloadable!] (restricted)
  20. Amegashie, J Atsu, 1999. " The Design of Rent-Seeking Competitions: Committees, Preliminary and Final Contests," Public Choice, Springer, vol. 99(1-2), pages 63-76, April. [Downloadable!] (restricted)
  21. Gradstein, Mark, 1998. "Optimal contest design: volume and timing of rent seeking in contests," European Journal of Political Economy, Elsevier, vol. 14(4), pages 575-585, November. [Downloadable!] (restricted)
  22. J. Oechssler & K.H. Schlag, . "Loss of Commitment? An Evolutionary Analysis of Bagwell's Example," Sonderforschungsbereich 373 1997-39, Humboldt Universitaet Berlin.
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  23. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1307-24, December. [Downloadable!] (restricted)
    Other versions:
  24. Werner GÜTH & Georg KIRCHSTEIGER & Klaus RITZBERGER, 1995. "Imperfectly Observable Commitments in n-Player Games," Vienna Economics Papers vie9507, University of Vienna, Department of Economics.
    Other versions:
Full references

Cited by:
(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. V. Bhaskar, 2005. "Commitment and Observability in an Economic Environment," Economics Discussion Papers 596, University of Essex, Department of Economics. [Downloadable!]
  2. Caruso, Raul, 2008. "Al Qaeda as a Tournament: Empirical Evidence," MPRA Paper 11693, University Library of Munich, Germany. [Downloadable!]
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