The nature of tournaments
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199_2010_Article_523.pdf
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Author(s)
Holden, Richard T.
Akerlof, Robert
Date Issued
March 2010
Journal
Economic Theory
Publisher
Springer-Verlag
Citation
Akerlof, Robert J., and Richard T. Holden. “The Nature of Tournaments.” Economic Theory 51.2 (2012): 289–313.
Version
Author's final manuscript
Abstract
This paper characterizes the optimal way for a principal to structure a rank-order tournament in a moral hazard setting (as in Lazear and Rosen in J Polit Econ 89:841–864, 1981). We find that it is often optimal to give rewards to top performers that are smaller in magnitude than corresponding punishments to poor performers. The paper identifies four reasons why the principal might prefer to give larger rewards than punishments: (1) R is small relative to P (where R is risk aversion and P is absolute prudence); (2) the distribution of shocks to output is asymmetric and the asymmetry takes a particular form; (3) the principal faces a limited liability constraint; and (4) there is agent heterogeneity of a particular form.
MIT Department
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1007/s00199-010-0523-4
