Self-Selection and the Efficiency of Tournaments

IZA Discussion Paper No. 1983

Gate Working Paper No. 06-03

37 Pages Posted: 2 Mar 2006

See all articles by Tor Eriksson

Tor Eriksson

Aarhus University - Department of Economics

Sabrina Teyssier

University of Angers - Institute of Economic Theory and Analysis (GATE)

Marie Claire Villeval

Groupe d'Analyse et de Théorie Economique (GATE), CNRS; IZA Institute of Labor Economics; Global Labor Organization (GLO)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

When exogenously imposed, rank-order tournaments have incentive properties but their overall efficiency is reduced by a high variance in performance (Bull, Schotter, and Weigelt 1987). However, since the efficiency of performance-related pay is attributable both to its incentive effect and to its selection effect among employees (Lazear, 2000), it is important to investigate the ex ante sorting effect of tournaments. This paper reports results from an experiment analyzing whether allowing subjects to self-select into different payment schemes helps in reducing the variability of performance in tournaments. We show that when the subjects choose to enter a tournament, the average effort is higher and the between-subject variance is substantially lower than when the same payment scheme is imposed. Mainly based on risk aversion, sorting is efficiency-enhancing since it increases the homogeneity of the contestants. We suggest that the flexibility of the labor market is an important condition for a higher efficiency of relative performance pay.

Keywords: tournament, performance pay, incentives, sorting, selection, experiment

JEL Classification: M52, J33, J31, C81, C91

Suggested Citation

Eriksson, Tor and Teyssier, Sabrina and Villeval, Marie Claire, Self-Selection and the Efficiency of Tournaments (February 2006). IZA Discussion Paper No. 1983, Gate Working Paper No. 06-03, Available at SSRN: https://ssrn.com/abstract=887754

Tor Eriksson

Aarhus University - Department of Economics ( email )

Fuglesangs Allé 4
Aarhus, 8210
Denmark
45 87164978 (Phone)

Sabrina Teyssier

University of Angers - Institute of Economic Theory and Analysis (GATE) ( email )

93, chemin des Mouilles
Monnaie et Finance at Lyon
69130 Ecully cedex
France

Marie Claire Villeval (Contact Author)

Groupe d'Analyse et de Théorie Economique (GATE), CNRS ( email )

93, chemin des Mouilles
Ecully, 69130
France
+33 472 86 60 79 (Phone)
+33 472 86 60 90 (Fax)

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IZA Institute of Labor Economics

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