The nature of tournaments
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 punis...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
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Springer-Verlag
2016
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| Online Access: | http://hdl.handle.net/1721.1/105152 |
| _version_ | 1826194894847213568 |
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| author | Holden, Richard T. Akerlof, Robert |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Holden, Richard T. Akerlof, Robert |
| author_sort | Holden, Richard T. |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T10:03:32Z |
| format | Article |
| id | mit-1721.1/105152 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T10:03:32Z |
| publishDate | 2016 |
| publisher | Springer-Verlag |
| record_format | dspace |
| spelling | mit-1721.1/1051522022-09-30T18:40:02Z The nature of tournaments Holden, Richard T. Akerlof, Robert Sloan School of Management Akerlof, Robert 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. 2016-10-28T21:23:00Z 2016-10-28T21:23:00Z 2010-03 2008-04 2016-08-18T15:23:41Z Article http://purl.org/eprint/type/JournalArticle 0938-2259 1432-0479 http://hdl.handle.net/1721.1/105152 Akerlof, Robert J., and Richard T. Holden. “The Nature of Tournaments.” Economic Theory 51.2 (2012): 289–313. en http://dx.doi.org/10.1007/s00199-010-0523-4 Economic Theory 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. Springer-Verlag application/pdf Springer-Verlag Springer-Verlag |
| spellingShingle | Holden, Richard T. Akerlof, Robert The nature of tournaments |
| title | The nature of tournaments |
| title_full | The nature of tournaments |
| title_fullStr | The nature of tournaments |
| title_full_unstemmed | The nature of tournaments |
| title_short | The nature of tournaments |
| title_sort | nature of tournaments |
| url | http://hdl.handle.net/1721.1/105152 |
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