Turning Up the Heat: The Discouraging Effect of Competition in Contests

55 Pages Posted: 30 Nov 2017 Last revised: 15 Feb 2019

See all articles by Dawei Fang

Dawei Fang

Göteborg University - Center For Finance; Göteborg University - Department of Economics

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Philipp Strack

University of California, Berkeley - Department of Economics

Date Written: January 30, 2019

Abstract

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at division level rather than firm level can boost employees' effort. Our results are also consistent with personnel policies which feature egalitarian pay systems and dismissal of worst-performing employees.

Keywords: all-pay contests, contest structures, competitiveness

JEL Classification: C72, D44, D72, D82, J31

Suggested Citation

Fang, Dawei and Noe, Thomas H. and Strack, Philipp, Turning Up the Heat: The Discouraging Effect of Competition in Contests (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=3077866 or http://dx.doi.org/10.2139/ssrn.3077866

Dawei Fang (Contact Author)

Göteborg University - Center For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Göteborg University - Department of Economics ( email )

Sweden

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Philipp Strack

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://philippstrack.com

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