University of Amsterdam - Faculty of Economics and Business (FEB); Institute for the Study of Labor (IZA)
University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)
Bas Van der Klaauw
VU University Amsterdam - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); Tinbergen Institute
CEPR Discussion Paper No. DP8016
In this paper we investigate how heterogeneous agents choose among tournaments with different prizes. We show that if the number of agents is sufficiently small, multiple equilibria can arise. Depending on how the prize money is split over the tournaments, these may include, for example, a perfect-sorting equilibrium in which high-ability agents compete in the high-prize tournament, while low-ability agents compete for the low prize. However, there are also equilibria in which agents follow a mixed strategy and there can be reverse sorting, i.e. low-ability agents are in the tournament with the high prize, while high-ability agents are in the low-prize tournament. We show that total effort always decreases compared to a single tournament. However, splitting the tournament may increase the effort of low-ability agents.
Number of Pages in PDF File: 24
Keywords: heterogenous agents, self-selection, social planner, tournament
JEL Classification: D02working papers series
Date posted: November 14, 2010
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