Tournaments: There Is More Than Meets the Eye
Gil S. Epstein, Shmuel Nitzan
By the well established tournament literature, incomplete information regarding the
employees’ productivity is essential for the rationalization of (efficiency-enhancing)
tournaments. In this paper we propose an alternative rationalization of tournaments focusing
on a fully informed principal whose objective is to maximize a weighted average of the
profitability (productivity) of his team and of the promotion-seeking efforts of his employees.
Our first main result clarifies the conditions under which the principal has an incentive to
create a tournament that determines the promoted employee. We then examine the effect of
the employees' productivity on their probability of promotion and on the extent of the
resources wasted in the tournament. In particular, we specify the conditions that ensure that
the most productive employee (the natural candidate for promotion) is less likely to be
promoted and the conditions under which higher employee's productivity results in increased
wasted promotion-seeking efforts.
Text: See Discussion Paper No. 1023