Core readings

Section 21.1:  Helping and Sabotage in Tournaments

Carpenter, Jeffrey., Peter Hans Matthews, and John Schirm, (2010). "Tournaments and office politics: Evidence from a real effort experiment," American Economic Review, 100(1): 504-17.

Experimentally explores the effects of sabotage in a real effort tournament with two forms of directed sabotage. Finds that sabotage (or "office politics") more than reverses the incentive effects of a tournament: adding a prize for the best performance reduces quality-adjusted output per worker, 

Section 21.2:  Collusion in Tournaments

Bandiera, Oriana., Iwan Barankay, and Imran Rasul, (2005). "Social preferences and the response to incentives: Evidence from personnel data," The Quarterly Journal of Economics, 120(3): 917-962.

Compares workers’ productivity under relative incentives with their productivity under piece rates. Workers were much less productive under relative incentives because they colluded to restrict output.   

Section 21.3:  Tournaments and Risk-Taking 

Brown, Keith C., W. Van Harlow, and Laura T. Starks, (1996). "Of tournaments and temptations:  An analysis of managerial incentives in the mutual fund industry," The Journal of Finance, 51(1): 85-110.

An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners.

Bothner, Matthew S, Jeong-han Kang, and Toby E. Stuart, “Competitive crowding and risk taking in a tournament: Evidence from NASCAR racing,” Administrative Science Quarterly, 2007, 52 (2), 208–247.

Using panel data on NASCAR's Winston Cup Series, the authors study the probability that a driver crashes his car in a race.  They show that drivers crash their vehicles with greater frequency when their positions are at risk of displacement by their nearby, lower-ranked counterparts.   In contrast to trying to ‘win by luck’ when one is otherwise out of the competition, this additional risk-taking appears to be driven by a desire to maintain one’s rank in a longer-term contest.  

Genakos, Christos and Mario Pagliero, Interim rank, risk taking, and performance in dynamic tournaments” Journal of Political Economy, 2012, 120 (4), 782–813.

In a study of Olympic weight lifters, the authors find that risk-taking is greatest among contestants in the middle ranks.  Revealing information on relative performance induces individuals trailing just behind the interim leaders to take greater risks, in order to advance in rank.

Fang, Dawei and Thomas Noe 2021 “Less competition, more meritocracy?” 2021 Journal of Labor Economics forthcoming.

“Uncompetitive” contests for grades, promotions, retention, and job assignments (where there are only a few contestants and most of them get prizes) are often criticized for being unmeritocratic.  But when contestants can choose how much risk to take, the authors show that lax standards and small contestant pools can make selection more meritocratic.  When many contestants compete for a few promotions, strategic contestants adopt high-risk strategies, which reduce the correlation between performance and ability and therefore raise the chances that a low-ability contestant will win. 

Liu, Qi and Bo Sun 2023 Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking American Economic Journal: Microeconomics 2023, 15(2): 568–598

 Suppose that CEO’s care about their relative wealth (compared to other CEOs), not just their absolute wealth.  How would we expect this to affect the types of contracts stockholders offer to CEOs?  The authors show that in equilibrium, all firms might choose to pay CEOs for luck, in addition to paying for performance.  This is because –if other firms are paying for luck—your own risk-averse CEO will value insurance against a compensation shortfall relative to their executive peers.

On the intrinsic rewards of winning:

Coffey, Bentley, and M. T. Maloney. "The Thrill of Victory: Measuring the Incentive to Win." Journal of Labor Economics 28, no. 1 (2010): 87-112. doi:10.1086/648318.

Using data from horse and dog races, the authors show that animals run faster when a race is close than when it is not.  This occurs regardless of the financial stakes (which the dogs, at least, are not aware of!). Thus, there appears to be an intrinsic motivation to win competitions over and above any financial prizes attached to winning.  

Blanes i Vidal, Jordi and Mareike Nossol. (2011) “Tournaments Without Prizes: Evidence from Personnel Records” Management Science57(10): 1721-1736. 

Conducts an experiment in a firm where workers are paid piece rates and management begins to reveal to workers their relative position in the distribution of pay and productivity. Results show that merely providing this information leads to a large and long-lasting increase in productivity that is costless to the firm. 

Charness, Gary, David Masclet, and Marie Claire Villeval (2014). “The Dark Side of Competition for Status.” Management Science.60(1): 38-55. 

In a laboratory experiment, simply informing contestants about their relative performance (without any financial incentives for rank) raised not only their effort levels, but raised the amount by which they sabotaged their co-workers and artificially inflated their own performance scores.  

Newer Resources

Section 21.1:  Helping and Sabotage in Tournaments

Flory, Jeffrey A.,  Andreas, Leibbrandt and John A. List, (2016). “The Effects of Wage Contracts on Workplace Misbehaviors: Evidence from a Call Center Natural Field Experiment,” NBER working paper number 22342.

Conducts a natural field experiment with more than 6500 donor phone calls across more than 80 workers. Findings show that even though standard relative performance pay contracts increase productivity relative to a fixed wage scheme, they have a dark side: they cause considerable cheating and sabotage of co-workers. 

Grosch, Kerstin., Marcela Iba~nez and Angelino Viceisza, (2017). "Competition and prosociality: A field experiment in Ghana," GlobalFodd Discussion paper 113, University of Goettingen. 

Investigates whether competitive bonuses have negative spillovers on coworkers’ prosocial behavior by conducting a lab-in-the-field experiment in Ghana. Results suggest that competition reduces prosociality when the dispersion of payments is high. However, when there is less at stake, competition does not affect prosociality.

Holzhacker, Martin Kamil, Stephan Kramer, Michal Matejka and Nick Hoffmeister. 2018  “Relative Target Setting and Cooperation”  unpublished manuscript, Arizona State University.  

The authors study how firms use past peer performance to revise managers’ performance targets in an industrial services company.  Consistent with tournament theory, the authors find that firms tend to avoid basing targets on peer performance in situations where co-operation between peers is important for productivity.  In this firm, co-operation is especially important when managers need to share specialized equipment and staff with their peers to manage capacity bottlenecks. 

Chen, Siyu and Zihan Hu “How Competition Shapes Peer Effects: Evidence from a University in China” unpublished paper, Cornell University.

 When multiple high-ability Chinese university students are randomly assigned to share a dorm room, their academic performance decreases.  These negative peer effects are greatest when the intensity of competition between the students increases.  Using a follow-up study, the authors argue that competition discourages help and induces unfriendly behaviors among roommates.

Section 21.2:  Collusion in Tournaments

Booth, William and Karla Adam, (2018). "The Washington Post: British farmers worry: Who will pick the fruit after Brexit?" The Washington Post, July 29. 

What are the prospects for Bandiera et al.’s fruit farm?

Section 21.3: Risk-Taking in Tournaments

Dijk, Oege, Martin Holmen, Michael Kirchler. 2014. Rank matters – the impact of social competition on portfolio choice. European Economic Review 66 97–110.

The authors use a laboratory experiment to study how relative performance-based incentive schemes and status concerns for higher rank influence portfolio choice.  They find that both underperformers and over-performers adapt their portfolios to their current relative performance, preferring either positively or negatively skewed assets, respectively.  Interestingly, these results hold not only when relative performance matters for pay, and when it does not.  Thus, simply attaining a high performance rank appears to raise subjects’ utility.

Kirchler, Michael, Florian Lindner, Utz Weitzel. 2018. Rankings and risk-taking in the finance industry. Journal of Finance 73(5) 2271–2302.

The authors use a lab-in-the-field experiment to study how financial professionals'  respond to relative performance-based incentives.  They find that both rank and tournament incentives increase risk‐taking among underperforming professionals.  

Peer performance reviews

Silverman, Rachel Emma and Leslie Kwoh, (2012).“Peer Performance Reviews Take Off, “ The Wall Street Journal, July 31.

About different variations of feedback systems and people’s attitudes towards these new programs.

Noguchi, Yuki, (2015). “Peer Review Feedback: The Good, The Bad, The Really Ugly," National Public Radio, August 21.

People have different opinions about employee reviews: 360 reviews could lead to demoralization, however, requiring constructive and professional feedback benefits the team. 

“360 Reviews” 

Buckingham, Marcus, (2011). “The fatal Flaw with 360 Surveys,” Harvard Business Review.

In some cases, 360 surveys gives us bad data: comments are given based on the relative performance between the rater and ratee. 

Jackson, Eric, (2012). “The 7 Reviews Why 360 Degree Feedback Programs Fail,” Forbes Investing, August 17.

If done poorly, 360 programs could create mistrust, anger and conflict in a team. 

Heathfiled, Susan M, (2018). “What is 360 Review in the Workplace?” The balance careers, April 30.

Introduction to 360 review: how it works and its role in an organization