Optimal prizes in dynamic elimination contests: Theory and experimental evidence

Abstract

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A survey of experimental research on contests, all-pay auctions and tournaments

“…Schmidt et al (2011) also find that the single-prize contest results in a higher aggregate effort than the multiple-prize contest, although their theoretical model predicts that under risk neutrality both contests are equivalent. Stracke et al (2012) show that even in a multi-stage elimination lottery contest between symmetric players, a single-prize generates higher efforts than when multiple prizes are allocated at the end of the contest. Multiple prizes also perform poorly in rank-order tournaments, as confirmed by Orrison et al (2004), who find that total effort is lower in tournaments with many small prizes than with few large prizes.…”

A Survey of Experimental Research on Contests, All-Pay Auctions and Tournaments

“…There is a growing number of experimental studies investigating the optimality of the prize structure in contests (Harbring and Irlenbusch, 2003;Orrison et al, 2004;Müller and Schotter, 2010;Chen et al, 2011;Sheremeta, 2011a;Shupp et al, 2013;Lim et al, 2014;Stracke et al, 2014). These studies are based on different theoretical models (i.e., lottery contests, all-pay auctions and rank-order tournaments), and thus they are not directly comparable.…”

Incentives to move up: Effects of pay gaps between levels on employee performance

“…Therefore, when there are multiple upward comparisons, given the same prize size, the performance incentive is larger in the first stage. Stracke et al () showed that compared with a winner‐takes‐all tournament, a tournament that allocates more prizes to first‐round winners results in a higher effort level in the first round. To our knowledge, no study has applied multistage tournament theory in the corporate context.…”

“…Second, our study is related to and adds to the labour economics literature that uses experiments to study the incentive effect of different prize structures in a tournament setting (Altmann, Falk, & Wibral, 2012;Delfgaauw, Dur, Non, & Verbeke, 2015;Freeman & Gelber, 2010;Sheremeta, 2010;Stracke, Höchtl, Kerschbamer, & Sunde, 2014). It is most closely related to Freeman and Gelber (2010), which examined prize spread (i.e., pay gap) and the performance of experimental participants.…”

“…Our study differs from theirs; however, in that, we adopt the two-round tournament setting and propose a non-linear relationship within each round. In terms of the two-round design, our study is similar to the experiments conducted by Altmann et al (2012), Delfgaauw et al (2015), Stracke et al (2014), and Sheremeta (2010); our extension to these studies lies in testing the differential performance effects of first-and second-round tournaments as well as in conducting a field study in addition to a laboratory experiment so as to examine the two-round tournament in a corporate context. Third, we integrate social comparison and tournament theory to examine the non-linear relationship between pay gaps and performance.…”