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The Value of Commitment in Contests and Tournaments when Observation is Costly

  • Felix Várdy

    (International Monetary Fund)

  • John Morgan

    (Haas School of Business & Department of Economics, UC Berkeley)

We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader's behavior. In a contest, the follower can pay to observe the leader's effort but cannot observe the effectiveness of that effort. In a tournament, the follower can pay to observe the effectiveness of the leader's effort but not the effort itself. We show that this distinction matters significantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are sufficiently small.

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File URL: http://128.118.178.162/eps/pe/papers/0504/0504005.pdf
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Paper provided by EconWPA in its series Public Economics with number 0504005.

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Length: 33 pages
Date of creation: 14 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwppe:0504005
Note: Type of Document - pdf; pages: 33
Contact details of provider: Web page: http://128.118.178.162

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  1. Jörg Oechssler & Karl H Schlag, 1997. "Loss of Commitment? An Evolutionary Analysis of Bagwell’s Example," Levine's Working Paper Archive 598, David K. Levine.
  2. Snyder, James M, 1989. "Election Goals and the Allocation of Campaign Resources," Econometrica, Econometric Society, vol. 57(3), pages 637-60, May.
  3. Ronald G. Ehrenberg & Michael L. Bognanno, 1988. "Do Tournaments Have Incentive Effects?," NBER Working Papers 2638, National Bureau of Economic Research, Inc.
  4. van Damme, E.E.C. & Hurkens, J.P.M., 1994. "Games with imperfectly observable commitment," Discussion Paper 1994-64, Tilburg University, Center for Economic Research.
  5. Morgan, John, 2003. " Sequential Contests," Public Choice, Springer, vol. 116(1-2), pages 1-18, July.
  6. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer, vol. 7(2), pages 283-290.
  7. Yildirim, Huseyin, 2005. "Contests with multiple rounds," Games and Economic Behavior, Elsevier, vol. 51(1), pages 213-227, April.
  8. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
  10. Werner GÜTH & Georg KIRCHSTEIGER & Klaus RITZBERGER, 1995. "Imperfectly Observable Commitments in n-Player Games," Vienna Economics Papers vie9507, University of Vienna, Department of Economics.
  11. Morgan, John, 2000. "Financing Public Goods by Means of Lotteries," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 761-84, October.
  12. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  13. Onsong Shin & Michael R. Baye, 1999. "Strategic Behavior in Contests: Comment," American Economic Review, American Economic Association, vol. 89(3), pages 691-693, June.
  14. Johnson, Paul E, 1996. " Corporate Political Offices in a Rent-Seeking Society," Public Choice, Springer, vol. 88(3-4), pages 309-31, September.
  15. Steffen Huck & Wieland Mueller, 1998. "Perfect versus imperfect observability---An experimental test of Bagwell's result," Experimental 9804001, EconWPA.
  16. V. Bhaskar, 2005. "Commitment and Observability in an Economic Environment," Economics Discussion Papers 596, University of Essex, Department of Economics.
  17. Baye, Michael R & Kovenock, Dan & de Vries, Casper G, 1994. " The Solution to the Tullock Rent-Seeking Game When R Is Greater Than 2: Mixed-Strategy Equilibria and Mean Dissipation Rates," Public Choice, Springer, vol. 81(3-4), pages 363-80, December.
  18. Gradstein, Mark, 1998. "Optimal contest design: volume and timing of rent seeking in contests," European Journal of Political Economy, Elsevier, vol. 14(4), pages 575-585, November.
  19. Gradstein, Mark & Konrad, Kai A, 1999. "Orchestrating Rent Seeking Contests," Economic Journal, Royal Economic Society, vol. 109(458), pages 536-45, October.
  20. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  21. Christian Riis & Derek J. Clark, 1997. "Contest success functions: an extension," Economic Theory, Springer, vol. 11(1), pages 201-204.
  22. Baye, Michael R. & Hoppe, Heidrun C., 2003. "The strategic equivalence of rent-seeking, innovation, and patent-race games," Games and Economic Behavior, Elsevier, vol. 44(2), pages 217-226, August.
  23. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-90, September.
  24. repec:ner:tilbur:urn:nbn:nl:ui:12-74216 is not listed on IDEAS
  25. Avinash Dixit, 1999. "Strategic Behavior in Contests: Reply," American Economic Review, American Economic Association, vol. 89(3), pages 694-694, June.
  26. Baik, Kyung H & Shogren, Jason F, 1992. "Strategic Behavior in Contests: Comment," American Economic Review, American Economic Association, vol. 82(1), pages 359-62, March.
  27. Morgan, John & Sefton, Martin, 2000. "Funding Public Goods with Lotteries: Experimental Evidence," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 785-810, October.
  28. Amegashie, J Atsu, 1999. " The Design of Rent-Seeking Competitions: Committees, Preliminary and Final Contests," Public Choice, Springer, vol. 99(1-2), pages 63-76, April.
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