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The nature of tournaments
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Akerlof, Robert J. and Holden, Richard T. (2012) The nature of tournaments. Economic Theory, Vol.51 (No.2). pp. 289-313. doi:10.1007/s00199-010-0523-4 ISSN 0938-2259.
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Official URL: http://dx.doi.org/10.1007/s00199-010-0523-4
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.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Journal or Publication Title: | Economic Theory | ||||
Publisher: | Springer | ||||
ISSN: | 0938-2259 | ||||
Official Date: | October 2012 | ||||
Dates: |
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Volume: | Vol.51 | ||||
Number: | No.2 | ||||
Page Range: | pp. 289-313 | ||||
DOI: | 10.1007/s00199-010-0523-4 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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