The Value of Commitment in Contests and Tournaments When Observation is Costly

UC Berkeley Competition Policy Center Working Paper No. CPC05-52

21 Pages Posted: 28 Jan 2005

See all articles by Felix Várdy

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute)

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: October 2004

Abstract

We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader's behavior. In a contest, the follower can pay to observe the leader's effort but cannot observe the effectiveness of that effort. In a tournament, the follower can pay to observe the effectiveness of the leader's effort but not the effort itself. We show that this distinction matters significantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are sufficiently small.

Keywords: Contests, tournaments, rent-seeking, commitment, costly leader games

JEL Classification: H10

Suggested Citation

Várdy, Felix and Morgan, John, The Value of Commitment in Contests and Tournaments When Observation is Costly (October 2004). UC Berkeley Competition Policy Center Working Paper No. CPC05-52. Available at SSRN: https://ssrn.com/abstract=655390 or http://dx.doi.org/10.2139/ssrn.655390

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

John Morgan (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

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