Fatter or Fitter? On Rewarding and Training in a Contest

Abstract

Competition between heterogeneous participants often leads to low effort provision in contests. We consider a principal who can divide her fixed budget between skill-enhancing training and the contest prize. Training can reduce heterogeneity, which increases effort. However, allocating some of the budget to training also reduces the contest prize, which makes effort fall. We set up an incomplete-information contest with heterogeneous players and show how this trade-off is related to the size of the budget when the principal maximizes expected effort. A selection problem can also arise in this framework in which there is a cost associated with a contest win by the inferior player. This gives the principal a larger incentive to train the expected laggard, reducing the size of the prize on offer.

Keywords: contest, skill-enhancement, budget division, selection problem

JEL Classification: D74, D72, D82