Optimal Effort Incentives in Dynamic Tournaments

University of Zurich, Department of Economics, Working Paper No. 175

54 Pages Posted: 4 Oct 2014

See all articles by Arnd Klein

Arnd Klein

University of Zurich

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2014

Abstract

This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of first- and second-period tournaments. In particular, the principal sets no first-period prize unless the observations in period one are considerably more precise than in period two.

Keywords: dynamic tournaments, repeated contests, information revelation, effort incentives

JEL Classification: D02, D44

Suggested Citation

Klein, Arnd and Schmutzler, Armin, Optimal Effort Incentives in Dynamic Tournaments (October 3, 2014). University of Zurich, Department of Economics, Working Paper No. 175, Available at SSRN: https://ssrn.com/abstract=2504918 or http://dx.doi.org/10.2139/ssrn.2504918

Arnd Klein (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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