multiperson tournaments an experimental examination modern hierarchical organizations like corporations must motivate agents to work hard given their pyramid structure it is not surprising that one commonly used motivator is the promotion tournament in such tournaments agents compete to advance to positions at higher organizational levels though these tournaments are common little research has empirically looked at the interface of organizational structure and tournament design this paper aims to take a step in filling this void by comparing the performance of various tournament designs using controlled laboratory techniques

modifying variability and correlations in winner take all contests we consider contests with a fixed proportion of winners based on relative performance special attention is paid to winner take all contests which we define as contests with relatively few winners receiving relatively large awards but we consider the full range of values of the proportion of winners if a contestant has the opportunity to modify the distribution of her performance what strategy is advantageous when the proportion of winners is less than one half a riskier performance distribution is preferred when this proportion is greater than one half it is better to choose a less risky distribution using a multinormal model we consider modifications in the variability of the distribution and in correlations with the performance of other contestants increasing variability and decreasing correlations lead to improved chances of winning when the proportion of winners is less than one half and the opposite directions should be taken for proportions greater than one half thus it is better to take chances and to attempt to distance oneself from the other contestants i e to break away from the herd when there are few winners a more conservative herding strategy makes sense when there are many winners our analytical and numerical results indicate that the probability of winning can change substantially as variability and or correlations are modified furthermore in a game theoretic setting in which all contestants can make modifications choosing a riskier less risky performance distribution when the proportion of winners is low high is the dominant best response strategy we briefly consider some practical issues related to the recommended strategies and some possible extensions

search duplication in research and design spaces exploring the role of local competition a lack of sufficient diversification in research strategies has been identified as an important problem for delegated research we show that this problem can be solved by local competition such as bribery lobbying rent seeking competition at the patent office among players who apply the same search strategies or develop the same design such competition can restore full efficiency in the non cooperative equilibrium local competition interacts with the choice of whether to cluster or diversify and rather than adding a further inefficiency to the existing ones it eliminates inefficiency the results are robust and hold under simultaneous search strategy choices as well as for sequential choices

combining economic forecasts a method for combining forecasts may or may not account for dependence and differing precision among forecasts in this article we test a variety of such methods in the context of combining forecasts of gnp from four major econometric models the methods include one in which forecasting errors are jointly normally distributed and several variants of this model as well as some simpler procedures and a bayesian approach with a prior distribution based on exchangeability of forecasters the results indicate that a simple average the normal model with an independence assumption and the bayesian model perform better than the other approaches that are studied here

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

optimal aggregation of money supply forecasts accuracy profitability and market efficiency we present a general procedure for aggregating expert forecasts which exploits regularities in the structure of information within the forecaster population specific information structures lead to aggregation methods which adjust for additive bias differences in individual accuracy and correlation among forecasts as an application we construct composite predictions of the weekly change in the money supply from forecasts made by twenty major securities dealers for which high positive correlation is found to be a significant characteristic due to instability in the information structure our methods cannot improve on the accuracy of a simple average in this case however they do capture information about the correlation among money supply forecasts which is not fully impounded in short term interest rates forecasts from our models accurately predict the direction of price changes for treasury bills and treasury bill futures after a money supply announcement the adjustment of prices to information in financial markets has been studied at length mostly from the perspective of the efficient markets hypothesis market efficiency tests typically look at the behavior of prices the end product

on the evolution of attitudes towards risk in winner take all games abstract a long standing conjecture is that winner take all games such as patent races lead to the survival of risk takers and the extinction of risk averters in many species a winner take all game determines the males right to reproduce and the same argument suggests that males will evolve to be risk takers psychological and sociological evidence buttresses the argument that males are more risk taking than females using an evolutionary model of preference formation we investigate to what extent evolution leads to risk taking in winner take all environments journal of economic literature classification numbers c7 d8

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners 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 furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

the optimal allocation of prizes in contests we study a contest with multiple not necessarily equal prizes contestants have private information about an ability parameter that affects their costs of bidding the contestant with the highest bid wins the first prize the contestant with the second highest bid wins the second prize and so on until all the prizes are allocated all contestants incur their respective costs of bidding the contest s designer maximizes the expected sum of bids our main results are 1 we display bidding equlibria for any number of contestants having linear convex or concave cost functions and for any distribution of abilities 2 if the cost functions are linear or concave then no matter what the distribution of abilities is it is optimal for the designer to allocate the entire prize sum to a single first prize 3 we give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

why some jobs command wage premiums a test of career tournament and internal labor market hypotheses the wage premiums associated with jobs in a large organization were identified through comparing their pay to the prevailing wages in the relevant outside labor markets we then examined the characteristics of those jobs to investigate why some commanded larger premiums than others jobs at the tops of promotion ladders jobs requiring many organization specific skills and to a lesser extent jobs with access to influence commanded greater wage premiums wages above market rates appear important in supporting the internal labor market mechanisms associated with these jobs findings may clarify the factors compensation managers should consider when positioning wage rates examination of these issues is a potentially important bridge between the study of internal labor markets in organizational research and the study of wages in economics

managerial motivation dynamics and incentives firms can increase profitability by appropriately motivating managers we investigate drivers of managerial motivation and propose how firms can use performance pay to alter motivational patterns we focus on the agent s optimal effort decision in trading off compensation utility with effort cost in a static and dynamic setting surprisingly we find that lower risk aversion or increased pay are not necessarily motivating factors and identify the relevant effort drivers underlying the agent s utility and compensation plan we characterize properties of agents preferences for output lotteries risk aversion aggressiveness prudence that trigger systematic motivational patterns with respect to a variety of factors such as the agent s productivity and past performance time to evaluation the firm s capabilities and market factors our insights are robust holding under very general modeling assumptions on preferences rewards and the stochastic effort output function

the demand for salmon in france the effects of marketing and structural change two aspects of change in the market for salmon in france during the 1980s are the subject of econometric analysis first an hypothesis that a change in the distribution pattern for salmon with a larger share of the product traded further down the distribution channel has lead to more elastic demand is tested via demand analysis second the effects of advertising in expanding the salmon market is tested

relative deprivation and economic welfare abstract it is shown that the theory of relative deprivation can be decomposed into two concepts deprivation and its relativity deprivation is interpreted as forgone utility due to lack of commodities thus minimizing deprivation and maximizing utility come to much the same thing the relativity of the concept stems from the existence of reference groups in the society the core of the paper deals with the effect of reference groups on the deprivation felt in the society

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract 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

tournament rewards and risk taking this article considers a lazear rosen tournament model where agents can influence both the spread of their output distribution risk taking and its mean the unique equilibrium induces excessive risk taking and a low level of effort by modifying the tournament to give the highest prize to the agent with the most moderate output a low level of risk taking and high level of effort can be sustained as an equilibrium the first result can be useful to understand the relative performance evaluation puzzle of executive compensation and the second result can be useful to understand puzzling workplace norms promoting mediocrity

risk behavior in response to quotas and contests much of the salesforce compensation literature has focused on developing incentive schemes to maximize effort levels on the part of the salesforce the amount of effort to expend in the selling task is considered to be the sole decision variable for a sales representative in this paper we introduce another key decision variable for a sales representative which is how much risk to undertake in the selling task in other words we consider the fact that for a sales representative riskiness of performance e g the dispersion of the probability distribution for sales is often a choice and not a given fate for example a sales representative trying to increase sales may have the choice of allocating a given amount of effort on the low risk approach of pursuing a small set of existing customers or incur the same effort on the high risk option of getting new larger customers to switch from competitors this paper examines how decisions on risk behavior on the part of the sales representatives are influenced by compensation schemes we show that such decisions are sensitive to the payoff structure when a quota based or a rank order contest based compensation scheme is used more specifically we argue that a high quota level or a rank order contest where only the top few win induce sales representatives to opt for high risk prospects whereas a low quota level or a rank order contest where a high proportion win induce sales representatives to opt for low risk prospects this does not stem from any kind of violation of standard expected utility theory but arises from the specific structure of jumps in payoffs it is not that the inherent risk attitudes of the sales representatives are being altered rather under some quota and contest conditions a more risky prospect may yield higher expected utility for an inherently risk averse sales representative while under some other quota and contest conditions a less risky prospect may lead to a higher expected utility for an inherently risk seeking sales representative the theoretical propositions are tested in a series of five experiments the first two experiments test the theoretical results of quota based compensation the quota levels are manipulated subjects select between segment types where the mean expected sales are the same but the variance varies the next two experiments test the risk behavior of subjects in contest based incentive schemes when the proportion of winners in the contest is manipulated the results provide strong support for our models with only a few subjects departing from the theoretical predictions a fifth experiment shows some cognitive response data to explain the behavior that is inconsistent with the theoretical predictions this paper provides implications that are useful for managers who design compensation schemes a common assumption in most normative models on salesforce compensation is that all sales representatives are either risk averse or risk neutral this might often lead to the conclusion that sales representatives cannot be expected to engage in high risk activities in the absence of a risk premium over and above the compensation scheme while this may be true if sales representatives are facing only a piece rate compensation plan it need not be the case when quota based or contest based compensation schemes are used our results suggest that when the sales quotas are set high or if the proportion of winners in a sales contest is low sales representatives may engage in high risk behavior alternatively if the quotas are low or the proportion of winners in a sales contest is high sales representatives may engage in low risk prospects hence if a firm would like to dampen high risk behavior on the part of the salesforce lowering quota levels or increasing the proportion of winners in sales contests might do so similarly in order to reduce conservatism towards risk moving up the quota levels or reducing the proportion of winners in sales contests could be useful our results extend beyond just salesforce management to any situation where payoffs are based on reaching a certain threshold level in performance or are based on relative performance for example similar implications hold in tournaments for promotion to a limited number of top management positions in an organization influencing the portfolio of r d managers and so on

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality