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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
Contact details of provider: Postal: Pockelsstr. 14, D-38106 Braunschweig
Web page: http://www.fiwi.tu-bs.de/

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  1. Heikki Rantakari, 2012. "Employee Initiative and Managerial Control," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 171-211, August.
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  6. Johannes Münster, 2007. "Selection Tournaments, Sabotage, and Participation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 943-970, December.
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  8. Clark, D.J. & Riis, C., 1996. "Rank-Order Tournaments and Selection," Memorandum 27/1996, Oslo University, Department of Economics.
  9. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
  10. Gürtler, Oliver & Münster, Johannes, 2010. "Sabotage in dynamic tournaments," Journal of Mathematical Economics, Elsevier, vol. 46(2), pages 179-190, March.
  11. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  13. 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.
  14. Hvide, Hans K. & Kristiansen, Eirik G., 2003. "Risk taking in selection contests," Games and Economic Behavior, Elsevier, vol. 42(1), pages 172-179, January.
  15. Gürtler, Oliver & Kräkel, Matthias, 2010. "Optimal tournament contracts for heterogeneous workers," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 180-191, August.
  16. Jed DeVaro, 2005. "Internal Promotion Competitions in Firms," Labor and Demography 0508005, EconWPA.
  17. Ján Zábojník, 2012. "Promotion tournaments in market equilibrium," Economic Theory, Springer, vol. 51(1), pages 213-240, September.
  18. Grund, Christian & Sliwka, Dirk, 2010. "Evidence on performance pay and risk aversion," Economics Letters, Elsevier, vol. 106(1), pages 8-11, January.
  19. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  20. 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.
  21. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  22. 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.
  23. 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.
  24. 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.
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