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The optimal allocation of prizes in tournaments of heterogeneous agents

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  • Loukas Balafoutas
  • Glenn Dutcher
  • Florian Lindner
  • Dmitry Ryvkin

Abstract

Tournaments are widely used in organizations, explicitly or implicitly, to reward the best-performing employees, e.g., through promotion or bonuses, and/or to punish the worst-performing employees, e.g., through firing or unfavorable job assignments. We explore the impact of the allocation of prizes on the effectiveness of tournament incentive schemes. We show that while multiple prize allocation rules are equivalent when agents are symmetric in their ability, the equivalence is broken in the presence of heterogeneity. Under a wide range of conditions, punishment tournaments, i.e., tournaments that award a low prize to relatively few bottom performers, are optimal for the firm. The reason is that low-ability agents are discouraged less in punishment tournaments, and hence can be compensated less to meet their participation constraints.

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  • Loukas Balafoutas & Glenn Dutcher & Florian Lindner & Dmitry Ryvkin, 2012. "The optimal allocation of prizes in tournaments of heterogeneous agents," Working Papers 2012-08, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2012-08
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    2. Mikhail Drugov & Dmitry Ryvkin, 2019. "The shape of luck and competition in tournaments," Working Papers w0251, New Economic School (NES).
    3. Drugov, Mikhail & Ryvkin, Dmitry, 2020. "Tournament rewards and heavy tails," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Florian Lindner & Michael Kirchler & Stephanie Rosenkranz & Utz Weitzel, 2019. "Social Status and Risk-Taking in Investment Decisions," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2019_07, Max Planck Institute for Research on Collective Goods.
    5. Drugov, Mikhail & Ryvkin, Dmitry, 2017. "Winner-Take-All Tournaments," CEPR Discussion Papers 12067, C.E.P.R. Discussion Papers.
    6. Dutcher, E. Glenn & Balafoutas, Loukas & Lindner, Florian & Ryvkin, Dmitry & Sutter, Matthias, 2015. "Strive to be first or avoid being last: An experiment on relative performance incentives," Games and Economic Behavior, Elsevier, vol. 94(C), pages 39-56.
    7. Lindner, Florian & Dutcher, E. Glenn & Balafoutas, Loukas & Ryvkin, Dmitry & Sutter, Matthias, 2013. "Strive to be first and avoid being last: An experiment on relative performance incentives," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79885, Verein für Socialpolitik / German Economic Association.
    8. Ryvkin, Dmitry & Drugov, Mikhail, 0. "The shape of luck and competition in winner-take-all tournaments," Theoretical Economics, Econometric Society.
    9. Dmitry Ryvkin & Mikhail Drugov, 2017. "Tournaments," Working Papers wp2017_03_02, Department of Economics, Florida State University.
    10. Drugov, Mikhail & Ryvkin, Dmitry, 2017. "Optimal Tournaments," CEPR Discussion Papers 12368, C.E.P.R. Discussion Papers.

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