When Randomization in Collective Tournaments is Profitable for the Principal
In the context of principal-agent theory risk is largely seen as a source that causes inefficiencies and lowers incentives and accordingly is not in the principal’s interest. In this paper I compare two different designs of a collective tournament where output in a team is generated through a particular two-stage production process. I show within a theoretical tournament framework that risk in terms of chance is beneficial from the point of view of a profit maximizing principal who organizes the tournament. Selecting an agent randomly that has to work at the final stage after all agents exerted effort at the first stage helps the principal to overcome a trade-off in incentive provision he faces when selecting the agent who works at the final stage before the tournament starts. This trade-off causes optimal efforts to be lower in a tournament without random selection compared to a tournament with random selection. As the higher efforts overcompensate additional wage costs the principal earns higher expected profits when selecting the agent that has to work at the second stage randomly after the first stage.
|Date of creation:||Dec 2008|
|Date of revision:||Mar 2009|
|Contact details of provider:|| Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany|
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de
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.:
- Edward P. Lazear, 1995.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262121883, June.
- Clark, Derek J & Riis, Christian, 1998. "Competition over More Than One Prize," American Economic Review, American Economic Association, vol. 88(1), pages 276-89, March.
- Ohlendorf, Susanne & Schmitz, Patrick W, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
- Clark, Derek & Konrad, Kai A., 2006.
"Contests with multi-tasking
[Contests with Multi-Tasking]," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-14, Social Science Research Center Berlin (WZB).
- Clark, Derek J. & Konrad, Kai A., 2007. "Contests with multi-tasking," Munich Reprints in Economics 22095, University of Munich, Department of Economics.
- Clark, Derek J. & Konrad, Kai A., 2006. "Contests with multi-tasking," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 125, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
- O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
- Dominique Demougin & Claude Fluet, 2003.
"Inequity Aversion in Tournament,"
CIRANO Working Papers
- Nitzan, Shmuel, 1991. "Collective Rent Dissipation," Economic Journal, Royal Economic Society, vol. 101(409), pages 1522-34, November.
- Lee, Sanghack, 1995. "Endogenous Sharing Rules in Collective-Group Rent-Seeking," Public Choice, Springer, vol. 85(1-2), pages 31-44, October.
- Lazear, Edward P & Rosen, Sherwin, 1981.
"Rank-Order Tournaments as Optimum Labor Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 89(5), pages 841-64, October.
- Moldovanu, Benny & Sela, Aner, 2002.
Sonderforschungsbereich 504 Publications
02-06, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Canice Prendergast, 2000. "The Tenuous Tradeoff Between Risk and Incentives," NBER Working Papers 7815, National Bureau of Economic Research, Inc.
- Edward P. Lazear & Paul Oyer, 2012.
[The Handbook of Organizational Economics]," Introductory Chapters, Princeton University Press.
- Katz, Eliakim & Tokatlidu, Julia, 1996. "Group competition for rents," European Journal of Political Economy, Elsevier, vol. 12(4), pages 599-607, December.
- Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
When requesting a correction, please mention this item's handle: RePEc:bon:bonedp:bgse19_2008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (BGSE Office)
If references are entirely missing, you can add them using this form.