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Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study

  • Wu, Steven
  • Roe, Brian
  • Sporleder, Thomas

Experimental economics is used to investigate two important hypotheses proposed in the economics literature on tournaments. Specifically, we test for a hypothesized “disincentives effect” which can occur in tournaments with mixed ability agents. We also test the well known hypothesis that, when common shocks are an important source of risk, tournaments can filter out this common shock and reduce earnings risk to workers. We find that disincentive effects arose in our tournament experiments, although these effects are not as strong as we predicted in our theoretical model and simulations. We also find that tournaments can be very effective at reducing earnings variation when common shocks are important. Taken together, these results suggest that the benefits of risk reduction from eliminating common shocks might outweigh the disincentive effects arising from mixed tournaments. We also find that the difference in average earnings between low and high ability agents is greater under tournaments than under absolute performance contracts.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21.

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Date of creation: Sep 2006
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Handle: RePEc:pra:mprapa:21
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  1. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Asymmetric Tournaments, Equal Opportunity Laws and Affirmative Action: Some Experimental Results," Working Papers 87-33, C.V. Starr Center for Applied Economics, New York University.
  2. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  3. Green, Jerry & Stokey, Nancy, 1983. "A Comparison of Tournaments and Contracts," Scholarly Articles 3203644, Harvard University Department of Economics.
  4. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  5. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  6. Frans van Dijk & Joep Sonnemans & Frans van Winden, 2000. "Incentive Systems in a Real Effort Experiment," CESifo Working Paper Series 272, CESifo Group Munich.
  7. Charness, Gary & Kuhn, Peter J., 2004. "Do Co-Workers’ Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort," IZA Discussion Papers 1417, Institute for the Study of Labor (IZA).
  8. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  9. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
  10. Kennedy, Peter W, 1995. "Performance Pay, Productivity and Morale," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 240-47, September.
  11. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  12. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
  13. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  14. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-79, April.
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