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Tournaments with Gaps

Author

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  • Imhof, Lorens
  • Kräkel, Matthias

Abstract

A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament.

Suggested Citation

  • Imhof, Lorens & Kräkel, Matthias, 2013. "Tournaments with Gaps," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 411, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:411
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    File URL: https://epub.ub.uni-muenchen.de/17236/1/411.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.
    3. James M. Malcomson, 1986. "Rank-Order Contracts for a Principal with Many Agents," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 807-817.
    4. Hisaki Kono & Nobuyuki Yagi, 2008. "Heterogeneous Contests And Less Informative Signals," The Japanese Economic Review, Japanese Economic Association, vol. 59(1), pages 113-126.
    5. Anja Schöttner, 2008. "Fixed-prize tournaments versus first-price auctions in innovation contests," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 57-71, April.
    6. Gürtler, Oliver, 2011. "The first-order approach in rank-order tournaments," Economics Letters, Elsevier, vol. 111(3), pages 185-187, June.
    7. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
    8. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-978, October.
    9. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
    10. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
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    Cited by:

    1. Gelder, Alan & Kovenock, Dan & Sheremeta, Roman, 2015. "Behavior in All-Pay Auctions with Ties," MPRA Paper 67517, University Library of Munich, Germany.
    2. Alberto Vesperoni, 2016. "A contest success function for rankings," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 47(4), pages 905-937, December.

    More about this item

    Keywords

    limited liability; moral hazard; risk aversion; tournament; unlimited liability;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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