Fairness and Desert in Tournaments
University of Oxford - Department of Economics
University of California, Los Angeles
October 6, 2009
Games and Economic Behavior, Vol. 69, No. 2, pp. 346-364, 2010
We model the behavior of agents who care about receiving what they feel they deserve in a two-player rank-order tournament. Perceived entitlements are sensitive to how hard an agent has worked relative to her rival, and agents are loss averse around their meritocratically determined endogenous reference points. In a fair tournament sufficiently large desert concerns drive identical agents to push their effort levels apart in order to end up closer to their reference points on average. In an unfair tournament, where one agent is advantaged, the equilibrium is symmetric in the absence of desert, but asymmetric in the presence of desert. We find that desert concerns can undermine the standard conclusion that competition for a fixed supply of status is socially wasteful and explain why, when the distribution of output noise is fat-tailed, an employer might use a rank-order incentive scheme.
Number of Pages in PDF File: 34
Keywords: Desert, Equity, Tournament, Loss Aversion, Reference-Dependent Preferences, Reference Point, Psychological Game Theory, Status, Relative Performance Evaluation
JEL Classification: D63, J33
Date posted: October 15, 2009 ; Last revised: December 30, 2010
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