Rank Order Contests with Sabotage: Equilibrium Analysis and Optimal Design

49 Pages Posted: 9 May 2016

See all articles by Haoming Liu

Haoming Liu

National University of Singapore (NUS) - Department of Economics

Jingfeng Lu

National University of Singapore (NUS) - Department of Economics

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics

Zhe Wang

National University of Singapore (NUS), Department of Economics

Date Written: May 7, 2016

Abstract

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

Suggested Citation

Liu, Haoming and Lu, Jingfeng and Riyanto, Yohanes E. and Wang, Zhe, Rank Order Contests with Sabotage: Equilibrium Analysis and Optimal Design (May 7, 2016). Available at SSRN: https://ssrn.com/abstract=2776868 or http://dx.doi.org/10.2139/ssrn.2776868

Haoming Liu (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

10 Kent Ridge Crest
Singapore 119260
Singapore

Jingfeng Lu

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Zhe Wang

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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