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The optimality of heterogeneous tournaments

  • Gürtler, Marc
  • Gürtler, Oliver

We investigate the effect of employee heterogeneity on the incentive to put forth effort in a market-based tournament. Employers use the tournament's outcome to estimate employees' abilities and accordingly condition their wage offers. Employees put forth effort, because by doing so they increase the probability of outperforming the rival, thereby increasing their ability assessment and thus the wage offer. We demonstrate that the tournament outcome provides more information about employees' abilities in case they are heterogeneous. Thus, employees get a higher incentive to affect the tournament outcome, and employers find it optimal to hire heterogeneous contestants.

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Paper provided by Technische Universität Braunschweig, Institute of Finance in its series Working Papers with number IF42V1.

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Date of creation: 2013
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Handle: RePEc:zbw:tbsifw:if42v1
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  1. Michael Bognanno & Eduardo Melero, 2012. "Promotion Signals, Age and Education," DETU Working Papers 1205, Department of Economics, Temple University.
  2. 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 841-64, October.
  3. Grund, Christian & Sliwka, Dirk, 2010. "Evidence on performance pay and risk aversion," Economics Letters, Elsevier, vol. 106(1), pages 8-11, January.
  4. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up-or-out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325.
  5. Heikki Rantakari, 2012. "Employee Initiative and Managerial Control," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 171-211, August.
  6. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  7. Gürtler, Oliver & Münster, Johannes, 2009. "Sabotage in dynamic tournaments
    [Sabotage in dynamischen Turnieren]
    ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2009-06, Social Science Research Center Berlin (WZB).
  8. Ján Zábojník, 2012. "Promotion tournaments in market equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 213-240, September.
  9. Barton H. Hamilton & Jack A. Nickerson & Hideo Owan, 2003. "Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 465-497, June.
  10. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
  11. Gürtler, Oliver & Kräkel, Matthias, 2010. "Optimal tournament contracts for heterogeneous workers," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 180-191, August.
  12. Jed DeVaro, 2006. "Internal promotion competitions in firms," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 521-542, 09.
  13. Franck, Egon & Nüesch, Stephan, 2010. "The effect of talent disparity on team productivity in soccer," Journal of Economic Psychology, Elsevier, vol. 31(2), pages 218-229, April.
  14. DeVaro, Jed & Waldman, Michael, 2006. "The signaling role of promotions: Further theory and empirical evidence," MPRA Paper 1550, University Library of Munich, Germany.
  15. Jennifer Brown, 2011. "Quitters Never Win: The (Adverse) Incentive Effects of Competing with Superstars," Journal of Political Economy, University of Chicago Press, vol. 119(5), pages 982 - 1013.
  16. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
  17. Johannes Münster, 2007. "Selection Tournaments, Sabotage, and Participation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 943-970, December.
  18. Derek Clark & Christian Riis, 2001. "Rank-order tournaments and selection," Journal of Economics, Springer, vol. 73(2), pages 167-191, June.
  19. Oliver Gürtler & Johannes Münster & Petra Nieken, 2013. "Information Policy in Tournaments with Sabotage," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(3), pages 932-966, 07.
  20. 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.
  21. repec:rje:randje:v:37:y:2006:3:p:521-542 is not listed on IDEAS
  22. Hvide, H.K. & Kristiansen, E.G., 1999. "Risk Taking in Selection Contests," Papers 5-99, Tel Aviv.
  23. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  24. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
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