Dynamically Sabotage-Proof Tournaments
This paper examines a two-period tournament where agents may possibly engage in destructive sabotage activities. Under plausible circumstances, sabotage proves to be an effective tool for low-ability agents, especially when they are faced with high-ability agents. The possibility of sabotage then gives rise to a dynamic concern, similar to the Ratchet effect, because an agent runs a risk of becoming the target of sabotage by signaling his high ability in early stages. In this dynamic setting, we first establish an impossibility result where the mere possibility of sabotage makes it impossible to implement the first-best effort due to this dynamic concern. Given this result, we then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The fast-track scheme is likely to prevail when the production process values diversity in inputs (submodular technologies) while the late-selection scheme is to prevail when it values homogeneity (supermodular technologies). The present model thus offers a mechanism through which both fast track and late selection arise in a unified framework, which can explain the difference in managerial practices between the US and Japan.
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