Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence

Using experimental economics, we compare the efficiency and welfare effects of tournaments and fixed performance contracts. Our subjects (agents) were generally better off under fixed performance contracts, but the advantage of the fixed performance contract disappears if the relative magnitude of the standard deviation of the common shock exceeds a critical value. Efficiency wise, agents tend to exert higher effort under fixed performance contracts, on average. Additionally, an increase in the common shock standard deviation appeared to be associated with lower effort under tournaments. Our results shed light on the potential impact of legislative proposals to ban tournament contracts.     

Books Reviewed

Books reviewed:
Julian M. Alston, Philip G. Pardey and Vincent H. Smith, (eds.) Paying for Agricultural Productivity
P.K. Rao, The Economics of Global Climatic Change
Bernard Salanie, The Economics of Contracts: A Primer
Raisuddin Ahmed, Steven Haggblade and Tawfiq-e-Elahi Chowdhury, (eds.) Out of the Shadow of Famine: Evolving Food Markets and Food Policy in Bangladesh
Lyle P. Schertz and Otto C. Doering III, The Making of the 1996 Farm Act
Joseph A. Herriges and Catherine L. Kling, Valuing Recreation and the Environment
James R. Prescott, Paul Van Moeseke and Jati Sengupta, (eds.) Urban-Regional Economics, Social System Accounts, and EcoBehavioural Science, Selected Writings of Karl A. Fox
Brent M. Haddad, Rivers of Gold: Designing Markets to Allocate Water in California
J. M. Antle, J. N. Lekakis and G. P. Zenias, (eds.) Agriculture, Trade and the Environment: The Impact of Liberalization on Sustainable Development
J. Barkley Rosser Jr., From Catastrophe to Chaos: A General Theory of Economic Discontinuities: Mathematics, Microeconomics, Macroeconomics, and Finance