Rank Order Contests with Sabotage: Equilibrium Analysis and Optimal Design
49 Pages Posted: 9 May 2016
Date Written: May 7, 2016
We establish the existence and uniqueness of pure-strategy equilibrium in two-worker rank order contests with sabotage while allowing interdependent effects of productive and sabotage effort. We find that diverging marginal costs in workers' productive effort discourage sabotage activity. For symmetric workers, it is optimal to set a pay dispersion that induces positive sabotage if and only if sabotage is less effective and the marginal cost of sabotage is small. The optimal pay dispersion decreases with the effectiveness and increases with the marginal cost of sabotage, but it does not change monotonically with the effectiveness of productive effort.
Keywords: First best; Pay dispersion; Rank-order contest; Sabotage
JEL Classification: C72; M12; M52; J31; J33
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