Academic journal article Management Revue

Incentive Effects in Tournaments with Heterogeneous Competitors - an Analysis of the Olympic Rowing Regatta in Sydney 2000**

Academic journal article Management Revue

Incentive Effects in Tournaments with Heterogeneous Competitors - an Analysis of the Olympic Rowing Regatta in Sydney 2000**

Article excerpt

A large part of the theoretical tournament literature argues that rank-order tournaments only unfold their incentive effects if the contestants all have similar prospects of winning. In heterogeneous fields, the outcome of the tournament is relatively clear and the contestants reduce their effort. However, empirical evidence for this so-called contamination hypothesis is sparse. An analysis of 442 showings at the Olympic Rowing Regatta in Sydney 2000 gives evidence that oarsmen spare effort in heterogeneous heats. This implies that competition among staffs with heterogeneous skill levels does not bring about the intended effort levels. However, a separate subgroup analysis shows that only the tournament favourites hold back effort whereas underdogs bring out their best when competing against dominant rivals. A heterogeneous tournament could then be enriched by absolute performance standards to increase incentives of the favourites.

Key words: tournaments, heterogeneity, incentive effects, effort

1. Introduction

As has been shown by Lazear/Rosen (1981), rank-order tournaments work, under certain conditions, as optimal labour contracts yielding the first best level of effort in an environment characterised by moral hazard. Hence, tournaments are not only of academic interest, but quite prominent in day-to-day work environments. For example, co-workers compete for promotions in internal labour markets (Malcomson 1984; Rosen 1986; Lazear 1989; Baker et al. 1994), teams compete for a project, firms compete for contracts. Furthermore, firms set bonus pools that are divided among staffs according to their relative performance (Krakel 2002; Raj an/Reichelstein 2006), e.g. in sales forces. Formally, such competition for bonuses also can be modelled as a tournament.

Tournament literature suggests that competition will only have incentive effects if an increase in effort increases the chances of winning. In heterogeneous fields, the underdog quickly realises his minimal chances of winning and reduces his effort to the level that just about secures the achievable rank. Vice versa, the favourite anticipates a noticeable competitive edge early on in the tournament. This implies two strategies. First, he also holds back effort right from the start. Second, he reduces his effort as soon as he realises the slowdown of his inferior competitors. The favourite will only increase his effort if he can expect to thereby increase his chances of winning. In this line of argument, heterogeneous tournaments do not have incentive effects; other incentive systems are more likely to affect employees (Frick et al. 2008: 385ff.). As a general conclusion, the incentive to put in additional effort decreases with increasing heterogeneity among competitors.

Despite its prominent role in the theoretical tournament literature, nonexperimental empirical evidence for the so-called contamination hypothesis is only limited. In their analysis of PGA-golf tournaments Ehrenberg/Bognanno (1990) did not find unambiguous negative impact of competitor heterogeneity on incentive effects. Independent from their own score, a match partner with a higher player score (exempt players) leads to an underperformance of golf players. For below-average players (nonexempt players), this is in line with the literature. On the other hand, above-average players should be challenged and motivated by the additional competition. However, this could not be confirmed in the study by Ehrenberg/Bognanno (1990). Horse race studies as e.g. provided by Lynch (2005) confirm that a closer competition motivates contestants to higher effort levels. Riders put in more effort in the second half of a race if the margin to the next best rank is only small; i.e. the rider hopes to win a rank by increasing his effort. Finally, with the help of data from the German soccer league, Frick et al. (2008) show that in narrow matches players are more often sanctioned with yellow and yellow/red cards. …

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