Principal‐agent and Peer Relationships in Tournaments

Effort provision in tournaments may depend on both social preferences towards the competitor and social preferences towards the principal who designed the tournament. In a laboratory experiment, we analyze agents' behavior in different tournament settings that vary the distribution of the prize between agents. The principal chooses between a low and a high guaranteed payment. Standard economic theory predicts the same effort provision in all situations. Instead, our results show that both the generosity of the principal and the strict separation between winner and loser increase the effort level in tournaments. Moreover, agents focus their preferences either on the principal or on the agent. Copyright © 2014 John Wiley & Sons, Ltd.     

Your failure is my opportunity—Effects of elimination in contests

In this paper, we consider a sequence of multi-prize all-pay auctions, where low-performing players are eliminated along the way. We provide sufficient conditions such that equilibrium behavior is unaffected by the prospects of winning prizes in later rounds. When these conditions are not met, we identify a novel externality effect and derive equilibria in a model with two rounds. We compare our results to knockout tournaments in which players are partitioned into subcontests in each round.     

Tournaments and piece rates revisited: a theoretical and experimental study of output-dependent prize tournaments

Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on fixed-prize tournaments where the prize to be awarded is set in advance, we introduce ‘output-dependent prizes’ where the tournament prize is endogenously determined by agents’ output—it is high when the output is high and low when the output is low. We show that tournaments with output-dependent prizes outperform fixed-prize tournaments and piece rates. A multi-agent experiment supports the theoretical result.     

An agency analysis of church–pastor relations

Incentives are critical to the study of economics. But do they work in non‐traditional economic settings, such as religious organizations, in a manner consistent with economic theory? This study considers the agency relationship between churches and their clergy. This paper contends that pastor compensation is not typically tied directly to performance, but rather indirectly through promotion tournaments. Pastors whose performance is recognized as being exceptional are rewarded by being called to larger, more prestigious congregations. Given the difficulty of observing and measuring pastor performance this represents a sensible solution to the church–pastor principal–agent problem. Copyright © 2001 John Wiley & Sons, Ltd.     

Introduction to the Symposium on Tournaments,Contests, and Relative Performance Evaluation

The papers in this symposium reflect several of the directions taken by current research on tournaments, contests and relative performance evaluation. The papers help us understand the implications of agent heterogeneity on the incentives of agents to perform or self‐select the offers designed for them. They encompass various issues such as career concerns and promotion incentives, interim disclosure of information obtained by the principal about agent performance, exposure to risk choices, and competing for talent.     

Allocating Ideas: Horizontal Competition in Tournaments

We develop a stylized model of horizontal and vertical competition in tournaments with two competing firms. The sponsor cares not only about the quality of the design but also about the design location. A priori not even the sponsor knows his preferred design location, which is only discovered once he has seen the actual proposals. We show that the more efficient firm is more likely to be conservative when choosing the design location. Also, to get some differentiation in design locations, the cost difference between contestants can be neither too small nor too big. Therefore, if the sponsor mainly cares about the design location, participation in the tournaments by the two lowest-cost contestants cannot be optimal for the sponsor.     

Feedback in Tournaments under Commitment Problems: Experimental Evidence

We theoretically as well as experimentally analyze tournaments in which one of the agents leads over the other before entering the tournament, that is, in which one of the competitors benefits from a head start. The principal may decide upon informing the agents about the degree of this asymmetry. She cannot commit to giving feedback ex ante or not and, thus, chooses the strategy that is optimal for her ex post. In equilibrium, the principal reveals information if the asymmetry is not too large. Our experimental findings qualitatively confirm our theoretical prediction. Moreover, behavior of the principal and the agents is well aligned to each other.     

U-type versus J-type tournaments as alternative solutions to the unverifiability problem

This paper discusses the properties of stylized U.S. (“U-type”) and Japanese tournaments (“J-type”), which can both solve the unverifiability problem of labor contracts. Under a zero-profit condition, both tournament types will yield first-best efforts if workers are homogeneous and risk neutral. This result will no longer hold for J-type tournaments if the employer has all the bargaining power. Moreover, if workers are risk averse, or if there is intermediate information, heterogeneity or unfairness, J-type tournaments may dominate U-type tournaments.     

The burden of glory: Competing for nonmonetary incentives in rank‐order tournaments

In an environment in which elite, highly paid professionals compete for nonmonetary rewards, we find evidence of underperformance. Our analysis suggests that choking under pressure from high‐stakes nonmonetary rewards is behind the underperformance. This implies that high stakes nonmonetary rewards can create meaningful pressure on individuals and lead to worse performance, a distinct issue that has yet to be adequately examined. These findings come from an examination of the behavior of top U.S. golfers competing to earn a place on the U.S. Ryder Cup team via their performance in PGA Tour tournaments with differing allocations of Ryder Cup qualifying points.     

The MNE investment location decision: Some empirical evidence

Factors governing MNE investment are typically divided into three groups-infrastructural variables, location-specific risk factors and government policy variables. The first objective of this paper is to assess the influence of these factors on MNE location decisions. The second objective is to test whether government participation in location tournaments (whereby local governments offer incentives to MNEs to influence their location decisions) is worthwhile. Arthur (1986,1990) points out that such participation is worthwhile if government policy has irreversible effects that persist after policy is withdrawn. In the estimation of the model, neither risk nor infrastructural factors are found to have a significant effect on the MNE investment location decision. However, there seems to be some evidence indicating that past investment decisions tend to have irreversible effects. Thus, government participation in location tournaments may be worthwhile.     

Preferences,choices, tournaments: Alternative foundations for the evaluation of voting schemes

The standard assumption underlying most of the negative results of the social choice theory is that the individuals have complete and transitive preference relations over the candidates. As an alternative to this assumption we consider the possibility that individuals can be characterized as possessing preference tournaments (i.e. asymmetric and complete relations) over the candidate set. We discuss the implications of the latter assumption to the negative results of social choice theory. Finally some solution concepts applicable in the individual preference tournament framework are outlined.     

Endogenous versus exogenous allocation of prizes in teams—Theory and experimental evidence

We present a model where compensation within a team is determined either exogenously by a third party or endogenously through a bargaining process among team members. In the exogenous case, we compare equal rewards with a tournament design. In the endogenous case, members compete in their efforts for the right to propose the distribution of the prize. Failure to reach an agreement on the proposal is costly and the role of proposer rotates in the order of members' efforts. We show in an experiment that tournaments induce higher efforts than equal rewards and that the influence of exogenously or endogenously allocating the prize depends on the specific bargaining rules in the endogenous case.     

Revising preferences and choices

Preferences and choices are subject to be modified when new information is brought to the knowledge of an agent, such strategy may suddenly appear more reliable than such other, such restaurant has to be retrieved from the list of the ten best tables of the town. We propose here an easy way to perform this revision through a simple modification of the chain of subsets attached to the agent’s behavior: it can be shown indeed that, in the rational case, these chains offer an adequate representation of preferences and of choice functions. Thus the revision problem boils down to adding, retracting or modifying some of the links of the original chain, a perspective that enables an effective treatment of the problem of iterated revision.     

Decomposing the effects of crowd-wisdom aggregators: The bias–information–noise (BIN) model

Aggregating predictions from multiple judges often yields more accurate predictions than relying on a single judge, which is known as the wisdom-of-the-crowd effect. However, a wide range of aggregation methods are available, which range from one-size-fits-all techniques, such as simple averaging, prediction markets, and Bayesian aggregators, to customized (supervised) techniques that require past performance data, such as weighted averaging. In this study, we applied a wide range of aggregation methods to subjective probability estimates from geopolitical forecasting tournaments. We used the bias–information–noise (BIN) model to disentangle three mechanisms that allow aggregators to improve the accuracy of predictions: reducing bias and noise, and extracting valid information across forecasters. Simple averaging operates almost entirely by reducing noise, whereas more complex techniques such as prediction markets and Bayesian aggregators exploit all three pathways to allow better signal extraction as well as greater noise and bias reduction. Finally, we explored the utility of a BIN approach for the modular construction of aggregators.     

Efficiency of the California electricity reserves market

We test the efficiency of the California electricity reserves market by examining systematic differences between its day- and hour-ahead prices. We uncover significant day-ahead premia, which we attribute to market design characteristics. On the demand side, the market design established a principal–agent relationship between the markets' buyers (principal) and their supervisory authority (agent). The agent had very limited incentives to shift reserve purchases to the lower priced hour-ahead markets. On the supply side, the market design raised substantial entry barriers by precluding purely speculative trading and by introducing a complicated code of conduct that induced uncertainty about which actions were subject to regulatory scrutiny. We use a high-dimensional vector moving average model to estimate the premia and conduct correct inferences. To obtain exact maximum likelihood estimates of the model, we develop a new EM algorithm that seamlessly incorporates missing data and applies directly to general moving average time series models. Our algorithm uses only analytical expressions: the Kalman filter and a fixed interval smoother in the E step and least squares-type regressions in the M step. Copyright © 2007 John Wiley & Sons, Ltd.     

Do tournaments solve the adverse selection problem?

This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that there may be no need for ex ante screening through menus of offers. This is so because the principal becomes better informed ex post about agent types, via the realization of common uncertainty, and can effectively penalize or reward the agents ex post. Thus, unlike the standard adverse selection problem without common uncertainty where the principal always benefits from ex ante screening, it is shown that ex post sorting through relative performance evaluation reduces the scope for ex ante screening through menus, and can eliminate it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinal tournament which is uniform among employees. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.     

Human Capital Spillovers within the Workplace: Evidence for Great Britain*

In this paper, we use a unique matched worker–workplace data set to estimate the effect on own earnings of co‐workers’ education. Our results, using the 1998 GB Workplace Employee Relations Survey, show significant effects. An independent, significantly positive effect from average workplace education is evident; own earnings premia from years of education fall only slightly when controlling for workplace education. This result suggests that the social returns to education are strongly positive – working with colleagues who each had 1.2 years (1 standard deviation) of more education than the average worker, boosts own earnings by 11.1%. An additional year of any single co‐worker's education is worth about 3.2% of an additional own year of education. We also test for interactions between own and co‐worker education levels and for ‘skills incompatibility’ when worker education levels are heterogeneous. The interactions appear negative: own education is not much valued at workplaces where co‐workers’ education levels are already high. There is no evidence that workplace heterogeneity in worker education levels adversely affects own earnings. This result runs counter to theoretical predictions, and suggests that workers compete in tournaments for high‐paying jobs.     

What do forecasting rationales reveal about thinking patterns of top geopolitical forecasters?

Geopolitical forecasting tournaments have stimulated the development of methods for improving probability judgments of real-world events. But these innovations have focused on easier-to-quantify variables, like personnel selection, training, teaming, and crowd aggregation—bypassing messier constructs, like qualitative properties of forecasters’ rationales. Here, we adapt methods from natural language processing (NLP) and computational text analysis to identify distinctive reasoning strategies in the rationales of top forecasters, including: (a) cognitive styles, such as dialectical complexity, that gauge tolerance of clashing perspectives and efforts to blend them into coherent conclusions and (b) the use of comparison classes or base rates to inform forecasts. In addition to these core metrics, we explore metrics derived from the Linguistic Inquiry and Word Count (LIWC) program. Applying these tools to multiple tournaments and to forecasters of widely varying skill (from Mechanical Turkers to carefully culled “superforecasters”) revealed that: (a) top forecasters show higher dialectical complexity in their rationales and use more comparison classes; (b) experimental interventions, like training and teaming, that boost accuracy also influence NLP profiles of rationales, nudging them in a “superforecaster” direction.     

How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests

We investigate the impact of investment managers׳ tournament incentives on investment strategies and market efficiency, distinguishing between winner-take-all tournaments (WTA), where a minority wins, and elimination contests (EC), where a majority wins. Theoretically, we show that investment managers play heterogeneous strategies in WTA and homogeneous strategies in EC, and markets are more prone to mispricing in WTA than in EC. Experimentally, we find that investment managers play more heterogeneous strategies in WTA than in EC, but this does not trigger significant differences in prices. Moreover, prices in WTA and EC do not differ significantly from markets composed of linearly incentivized subjects.     

Showing or telling? Local interaction and organization of behavior

We present a choice model based on agent interaction. Interaction is modeled as face-to-face communication that takes place on a regular periodic lattice with decision-makers exchanging information only with immediate neighbors. We investigate the long-run (equilibrium) behavior of the resulting system and show that for a large range of initial conditions clustering in economic behavior emerges and persists indefinitely. Unlike many models in the literature, our model allows for the analysis of multi-option environments. Therefore, we add to existing results by deriving the equilibrium distribution of option popularity and thus, implicitly, of market shares. Additionally, the model sheds new light on the emergence of the novel behavior in societies.