Turning Up the Heat: The Discouraging Effect of Competition in Contests
55 Pages Posted: 30 Nov 2017 Last revised: 15 Feb 2019
Date Written: January 30, 2019
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: Suggested Citation