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Testing Canonical Tournament Theory: On the Impact of Risk, Social Preferences and Utility Structure

Author

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  • Sheremeta, Roman M.

    () (Chapman University)

  • Wu, Steven Y.

    () (Purdue University)

Abstract

We use experiments to test comparative statics predictions of canonical tournament theory. Both the roles of principal and agent are populated by human subjects, allowing us to test predictions for both incentive responses and optimal tournament design. Consistent with theory, we observed an incentive effect from raising the winner's prize. However, we also observed several empirical puzzles that appeared to contradict theory. Controlling for social preferences did not resolve the puzzles, although social preferences do influence behavior. It turns out that the puzzles can be explained by the canonical model once the textbook assumption of separable agent utility is relaxed.

Suggested Citation

  • Sheremeta, Roman M. & Wu, Steven Y., 2012. "Testing Canonical Tournament Theory: On the Impact of Risk, Social Preferences and Utility Structure," IZA Discussion Papers 6304, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6304
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, March.
    2. Paul J. Healy, 2007. "Group Reputations, Stereotypes, and Cooperation in a Repeated Labor Market," American Economic Review, American Economic Association, vol. 97(5), pages 1751-1773, December.
    3. Cason, Timothy N. & Masters, William A. & Sheremeta, Roman M., 2010. "Entry into winner-take-all and proportional-prize contests: An experimental study," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 604-611, October.
    4. Richard B. Freeman & Alexander M. Gelber, 2010. "Prize Structure and Information in Tournaments: Experimental Evidence," American Economic Journal: Applied Economics, American Economic Association, vol. 2(1), pages 149-164, January.
    5. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, March.
    6. Petra Nieken, 2010. "On the Choice of Risk and Effort in Tournaments-Experimental Evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 811-840, September.
    7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    8. Steven Wu & Brian Roe, 2005. "Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 130-146.
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    Cited by:

    1. Emanuela Lezzi & Piers Fleming & Daniel John Zizzo, 2015. "Does it matter which effort task you use? A comparison of four effort tasks when agents compete for a prize," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 15-05, School of Economics, University of East Anglia, Norwich, UK..
    2. Magnus Hoffmann & Martin Kolmar, 2013. "Distributional Preferences in Probabilistic and Share Contests," CESifo Working Paper Series 4184, CESifo Group Munich.

    More about this item

    Keywords

    tournaments; experiment; social preferences; contract theory;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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