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Turning Up the Heat: The Discouraging Effect of Competition in Contests

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  • Dawei Fang
  • Thomas Noe
  • Philipp Strack

Abstract

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at the division level rather than the firm level can boost employees’ effort. Our results are also consistent with personnel policies that feature egalitarian pay systems and dismissal of worst-performing employees.

Suggested Citation

  • Dawei Fang & Thomas Noe & Philipp Strack, 2020. "Turning Up the Heat: The Discouraging Effect of Competition in Contests," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1940-1975.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/705670
    DOI: 10.1086/705670
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    Citations

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    Cited by:

    1. Kai A. Konrad & Dan Kovenock, 2022. "Introduction to the Special Issue on Contests," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(4), pages 1017-1023, November.
    2. Letina, Igor & Liu, Shuo & Netzer, Nick, 2023. "Optimal contest design: Tuning the heat," Journal of Economic Theory, Elsevier, vol. 213(C).
    3. Drugov, Mikhail & Ryvkin, Dmitry, 2020. "Tournament rewards and heavy tails," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Fu, Qiang & Wang, Xiruo & Wu, Zenan, 2021. "Multi-prize contests with risk-averse players," Games and Economic Behavior, Elsevier, vol. 129(C), pages 513-535.
    5. Juan Beccuti & Marc M ller, 2020. "Fighting for Lemons: The Encouragement Effect in Dynamic Contests with Private Information," Diskussionsschriften dp2017, Universitaet Bern, Departement Volkswirtschaft.
    6. Zhang, Mengxi, 2024. "Optimal contests with incomplete information and convex effort costs," Theoretical Economics, Econometric Society, vol. 19(1), January.
    7. Shelegia, Sandro & Wilson, Chris M., 2022. "Costly participation and default allocations in all-pay contests," MPRA Paper 115027, University Library of Munich, Germany.
    8. Liqun Liu & Nicolas Treich, 2021. "Optimality of winner-take-all contests: the role of attitudes toward risk," Journal of Risk and Uncertainty, Springer, vol. 63(1), pages 1-25, August.
    9. Enzo Brox & Daniel Goller, 2024. "Tournaments, Contestant Heterogeneity and Performance," Papers 2401.05210, arXiv.org.
    10. Bastani, Spencer & Giebe, Thomas & Gürtler, Oliver, 2022. "Simple equilibria in general contests," Games and Economic Behavior, Elsevier, vol. 134(C), pages 264-280.
    11. Liu, Bin & Lu, Jingfeng, 2023. "Optimal orchestration of rewards and punishments in rank-order contests," Journal of Economic Theory, Elsevier, vol. 208(C).
    12. Sumit Goel, 2022. "Optimal grading contests," Papers 2205.05207, arXiv.org, revised Sep 2023.
    13. Arne Lauber & Christoph March & Marco Sahm, 2022. "Optimal and Fair Prizing in Sequential Round-Robin Tournaments: Experimental Evidence," CESifo Working Paper Series 9651, CESifo.
    14. Li, Teng & Lu, Runjing, 2022. "Social undermining as a dark side of symbolic awards: Evidence from a regression discontinuity design," Organizational Behavior and Human Decision Processes, Elsevier, vol. 173(C).
    15. Zhu, Feng, 2021. "On optimal favoritism in all-pay contests," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    16. Lauber, Arne & March, Christoph & Sahm, Marco, 2023. "Optimal and fair prizing in sequential round-robin tournaments: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 141(C), pages 30-51.
    17. Matthew Embrey & Christian Seel & J. Philipp Reiss, 2020. "Gambling in Risk-Taking Contests: Experimental Evidence," Working Paper Series 1620, Department of Economics, University of Sussex Business School.
    18. Fu, Qiang & Wu, Zenan & Zhu, Yuxuan, 2022. "On equilibrium existence in generalized multi-prize nested lottery contests," Journal of Economic Theory, Elsevier, vol. 200(C).
    19. Yingkai Li & Xiaoyun Qiu, 2023. "Screening Signal-Manipulating Agents via Contests," Papers 2302.09168, arXiv.org, revised Feb 2024.
    20. Marcel Nutz & Yuchong Zhang, 2021. "Mean Field Contest with Singularity," Papers 2103.04219, arXiv.org.
    21. Fu, Qiang & Wu, Zenan & Zhu, Yuxuan, 2023. "On equilibrium uniqueness in generalized multi-prize nested lottery contests," Games and Economic Behavior, Elsevier, vol. 139(C), pages 180-199.
    22. Marcel Nutz & Yuchong Zhang, 2021. "Reward Design in Risk-Taking Contests," Papers 2102.03417, arXiv.org, revised Nov 2021.
    23. Lorens A. Imhof & Matthias Kräkel, 2023. "Team Diversity and Incentives," Management Science, INFORMS, vol. 69(4), pages 2497-2516, April.
    24. Mayskaya, Tatiana & Nikandrova, Arina, 2023. "The dark side of transparency: When hiding in plain sight works," Journal of Economic Theory, Elsevier, vol. 212(C).

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