Promotion and demotion contests

Abstract

To increase total effort, we design a two-stage lottery contest where heterogeneous agents face the prospect of promotion and the threat of demotion from one stage to the next. We develop two competing theoretical models to generate predictions about behaviour: (i) the standard economic model and (ii) a behavioural model where agents derive non-monetary utility from winning. The experimental results provide strong support for the use of promotion and demotion in contests when ability differences are small, however, they do not provide strong support for the use of promotion and demotion in contests when ability differences are large. Our experimental results are consistent with the predictions made by the behavioural model.

Keywords: Promotion, demotion, heterogeneity, contest design, experiments

JEL Classification: C72, C92, D72, J33, M51