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Optimal effort incentives in dynamic tournaments


Klein, Arnd Heinrich; Schmutzler, Armin (2014). Optimal effort incentives in dynamic tournaments. Working paper series / Department of Economics 175, University of Zurich.

Abstract

This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of first- and second-period tournaments. In particular, the principal sets no first-period prize unless the observations in period one are considerably more precise than in period two.

Abstract

This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of first- and second-period tournaments. In particular, the principal sets no first-period prize unless the observations in period one are considerably more precise than in period two.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D02, D44
Uncontrolled Keywords:dynamic tournaments, repeated contests, information revelation, effort incentives
Language:English
Date:October 2014
Deposited On:09 Oct 2014 08:20
Last Modified:08 Dec 2017 07:30
Series Name:Working paper series / Department of Economics
Number of Pages:53
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/workingpapers.php
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php?id=854

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