Dynamically Sabotage-Proof Tournaments

Abstract:     
This paper explores the consequences of sabotage for the design of incentive contracts. The possibility of sabotage gives rise to a dynamic concern, similar to the Ratchet effect, which distorts the agents' incentives. We first show that the mere possibility of sabotage may make it impossible to implement the first-best effort, and then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The present model offers a mechanism through which these two schemes arise in a unified framework.

Number of Pages in PDF File: 34

Keywords: Sabotage, Tournament, Fast track, Late selection

JEL Classification: J41;M12.

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