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The nature of tournaments

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  • Robert Akerlof
  • Richard Holden

Abstract

This paper characterizes the optimal way for a principal to structure a rank-order tournament in a moral hazard setting (as in Lazear and Rosen in J Polit Econ 89:841–864, 1981). We find that it is often optimal to give rewards to top performers that are smaller in magnitude than corresponding punishments to poor performers. The paper identifies four reasons why the principal might prefer to give larger rewards than punishments: (1) R is small relative to P (where R is risk aversion and P is absolute prudence); (2) the distribution of shocks to output is asymmetric and the asymmetry takes a particular form; (3) the principal faces a limited liability constraint; and (4) there is agent heterogeneity of a particular form. Copyright Springer-Verlag 2012

Suggested Citation

  • Robert Akerlof & Richard Holden, 2012. "The nature of tournaments," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 289-313, October.
  • Handle: RePEc:spr:joecth:v:51:y:2012:i:2:p:289-313
    DOI: 10.1007/s00199-010-0523-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Prizes; Tournaments; L22;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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