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

65 Pages Posted: 30 Nov 2017  

Dawei Fang

Göteborg University - Center For Finance

Thomas H. 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: November 22, 2017

Abstract

We demonstrate, in the standard, symmetric complete-information all-pay contest framework, that, whenever marginal effort costs are increasing, increasing contest competitiveness demoralizes contestants, thereby reducing the mean and increasing the riskiness of output. This demoralization effect imposes testable restrictions on the mean and variability of output which we verify using extant experimental and field data. 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) both reduces inequality and increases expected output. Reducing class size, simply by reducing classroom competition, improves student performance.

Keywords: all-pay contests, risk-taking, contest structures

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

Suggested Citation

Fang, Dawei and Noe, Thomas H. H. and Strack, Philipp, Turning Up the Heat: The Demoralizing Effect of Competition in Contests (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=3077866

Dawei Fang (Contact Author)

Göteborg University - Center For Finance ( email )

Box 640
Gothenburg, 403 50
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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