Working Paper: CEPR ID: DP8016
Authors: Edwin Leuven; Hessel Oosterbeek; Bas van der Klaauw
Abstract: In this paper we investigate how heterogeneous agents choose among tournaments with different prizes. We show that if the number of agents is sufficiently small, multiple equilibria can arise. Depending on how the prize money is split over the tournaments, these may include, for example, a perfect-sorting equilibrium in which high-ability agents compete in the high-prize tournament, while low-ability agents compete for the low prize. However, there are also equilibria in which agents follow a mixed strategy and there can be reverse sorting, i.e. low-ability agents are in the tournament with the high prize, while high-ability agents are in the low-prize tournament. We show that total effort always decreases compared to a single tournament. However, splitting the tournament may increase the effort of low-ability agents.
Keywords: heterogeneous agents; self-selection; social planner; tournament
JEL Codes: D02; D04
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tournament structure (L10) | effort levels (D29) |
| number of agents is small (L85) | multiple equilibria (D50) |
| allocation of prize money (Z23) | perfect-sorting equilibrium (D51) |
| tournaments are split (C72) | total effort decreases (D29) |
| marginal costs of effort (J30) | tournament choices (Z29) |
| difference in prize money is small (D44) | reverse sorting occurs (C69) |
| social planner aims to maximize total effort (D71) | avoid splitting tournaments (C72) |