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When to use tournament incentives? Evidence from an investment experiment

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  • Zhang, Kun
  • Yang, Xiaolan
  • Gao, Mei

Abstract

This paper theoretically and experimentally investigates how different tournament incentives affect managerial decision-making and firm value. Our theoretical model shows that when the economy is in a downturn, linear incentive and elimination contests can ensure that CEO-optimal investment (maximize personal income) is consistent with firm-optimal investment (maximize firm value), while a winner-take-all tournament makes CEO-optimal investment deviate from firm-optimal investment. When the economy is prosperous, a linear incentive and winner-take-all can ensure that CEO-optimal investment is consistent with firm-optimal investment, while elimination contests make CEO-optimal investment deviate from firm-optimal investment. The experimental results broadly support the above predictions. However, elimination contests (winner-take-all) are more efficient than linear incentives when the economy is in a downturn (i.e., prosperous). We conjecture that this result occurs because elimination contests and winner-take-all, which involve interactions between subjects, induce learning effects. In addition, winner-take-all and elimination contests lead to more rational behavior than linear incentives.

Suggested Citation

  • Zhang, Kun & Yang, Xiaolan & Gao, Mei, 2023. "When to use tournament incentives? Evidence from an investment experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:beexfi:v:37:y:2023:i:c:s2214635022000995
    DOI: 10.1016/j.jbef.2022.100777
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    More about this item

    Keywords

    Winner-take-all; Elimination contests; CEO decision-making; Firm value;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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