Tournaments: There Is More Than Meets the Eye
By the well established tournament literature, incomplete information regarding the employees’ productivity is essential for the rationalization of (efficiency-enhancing) tournaments. In this paper we propose an alternative rationalization of tournaments focusing on a fully informed principal whose objective is to maximize a weighted average of the profitability (productivity) of his team and of the promotion-seeking efforts of his employees. Our first main result clarifies the conditions under which the principal has an incentive to create a tournament that determines the promoted employee. We then examine the effect of the employees' productivity on their probability of promotion and on the extent of the resources wasted in the tournament. In particular, we specify the conditions that ensure that the most productive employee (the natural candidate for promotion) is less likely to be promoted and the conditions under which higher employee's productivity results in increased wasted promotion-seeking efforts.
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- 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 841-864, October.
- Rosen, Sherwin, 1986.
"Prizes and Incentives in Elimination Tournaments,"
American Economic Review,
American Economic Association, vol. 76(4), pages 701-715, September.
- Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
- Gil S. Epstein & Shmuel Nitzan, 2002. "Politics of Randomness," CESifo Working Paper Series 803, CESifo Group Munich.
- Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
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