IDEAS home Printed from https://ideas.repec.org/p/ncs/wpaper/019.html
   My bibliography  Save this paper

Tournaments and Liquidity Constraints for the Agents

Author

Listed:
  • Kosmas Marinakis

    (Department of Economics, North Carolina State University)

  • Theofanis Tsoulouhas

    (Department of Economics, North Carolina State University)

Abstract

A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents and production is subject to common shocks that are large relative to the idiosyncratic shocks. This is because tournaments get closer to the first best by filtering common uncertainty. This paper shows that, surprisingly, tournaments are superior even when agents are liquidity constrained so that transfers to them cannot fall short of a predetermined level. The rationale is that, by providing insurance against common shocks through a tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease which enables the principal to satisfy tight liquidity constraints for the agents without paying any ex ante rents to them, while simultaneously providing higher-power incentives than under piece rates.

Suggested Citation

  • Kosmas Marinakis & Theofanis Tsoulouhas, 2006. "Tournaments and Liquidity Constraints for the Agents," Working Paper Series 019, North Carolina State University, Department of Economics, revised Apr 2008.
    • Handle: RePEc:ncs:wpaper:019
    Note: First draft 2006
    as

    Download full text from publisher

    File URL: ftp://ftp.ncsu.edu/pub/ncsu/economics/RePEc/pdf/TournamentsAndLCs.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    piece rates; tournaments; liquidity constraints;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ncs:wpaper:019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Theofanis Tsoulouhas (email available below). General contact details of provider: https://edirc.repec.org/data/dencsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.