Working Paper: CEPR ID: DP10192
Authors: Arnd Heinrich Klein; Armin Schmutzler
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.
Keywords: dynamic tournaments; effort incentives; information revelation; repeated contests
JEL Codes: D02; D44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distribution of prizes (D30) | Agent effort (L85) |
| Higher weight on first-period performance in second-period prize (D29) | Overall effort (D29) |
| Revealing performance information (Y10) | Higher expected efforts in second period (D29) |
| Error distribution of performance measures is precise (C46) | Optimal weight assigned to past performance (G11) |
| Optimal weight assigned to past performance (G11) | Future competition and effort levels (L13) |