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Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study

Author

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  • Wu, Steven Y.
  • Roe, Brian E.
  • Sporleder, Thomas L.

Abstract

Two well-known hypotheses from the literature on tournaments are that (1) tournaments can filter out common shocks thereby reducing agents' risk exposure; and (2) disincentive effects can arise when a tournament scheme is administered on a group of mixed ability agents. While handicapping and/or the creation of homogeneous groups have been suggested as mechanisms for mitigating disincentive effects, it is often impractical to use handicapping schemes and nearly impossible to create a completely homogeneous labor force. Hence, contract administrators who intend to use tournaments to elicit effort must be able to assess the positive effects of tournaments (eliminate common shocks) against the negative effects (disincentive effects). Using economic experiments, we find evidence of disincentive effects under tournaments, although these effects are not as strong as predicted. Moreover, tournaments can be effective at reducing earnings variability when common shocks are important. These results suggest that the benefits of risk reduction from eliminating common shocks might outweigh the disincentive effects arising from mixed tournaments.

Suggested Citation

  • Wu, Steven Y. & Roe, Brian E. & Sporleder, Thomas L., 2007. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon 9703, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea07:9703
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    References listed on IDEAS

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    1. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-341, June.
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    11. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    Cited by:

    1. Agranov, Marina & Tergiman, Chloe, 2013. "Incentives and compensation schemes: An experimental study," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 238-247.
    2. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute for the Study of Labor (IZA), pages 302-302, October.
    3. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.

    More about this item

    Keywords

    Research Methods/ Statistical Methods;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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