Relative performance tournaments

Relative performance tournaments are a form of relative performance appraisal of an employee within a company or organization. The performance of the employees is compared and, as a relative assessment, forms the basis of the employee's remuneration. This special remuneration scheme is intended to create incentives for employees so that they show a better performance in terms of their output or previous investments. The original tournament theory was developed by Edward P. Lazear and Sherwin Rosen in 1981 before the tournament model was further modified over the years so that many different forms of tournament solution can be found today.

Edward P. Lazear

Reasons for a tournament solution

Relative performance tournaments (rank-order tournaments) are found everywhere in company practice where several employees are compared with one another on the basis of their achievements. This comparison of performance has consequences for the income of those involved. Typical examples of competitive tournaments are promotion tournaments or assessment centers. They are based on the principal-agent theory . In the case of performance tournaments, the employee represents the agent, while the employer represents the principal, who are in a contractual relationship with one another, since the principal is dependent on the performance or human capital of the agent and the agent is rewarded for it. However, the principal cannot observe how hard the agent is trying and how conscientiously he goes about his tasks. They also have the advantage that they are the solution to three essential problems. The first problem would be the non-contractability of the work performed, which is prevented by self-commitment by the company management. The principal cannot retrospectively reduce labor costs because he falsely claims that the agents have underperformed. Even before the start of the tournament, a fixed tournament price structure was determined, which can also be observed from third parties and thus contracted. Due to the binding tournament price structure, every employee will not hold back and give their best, as everyone wants to receive the winner's prize. The second problem would be the non-contractability of company-specific human capital. In principle, this can be solved in the same way as the non-contractable work performance. Only the performance criterion is exchanged. The winning prize is no longer given to the employee with the highest work performance, but to the employee with the greatest company-specific human capital, which cannot be calculated exactly but is specified in an ordinal order. The third and final problem would be the hidden action problem. The work input e of an employee is not observable, but his work result q (e, ϴ). In addition to performance tournaments, one-time prizes or bonuses are possible that depend on q. A reluctance to perform and thus a hidden action problem is counteracted by performance competition.

Original theory

With their tournament model, Lazear and Rosen linked for the first time relative performance assessments in the form of a tournament with the job market. In their work, they investigated to what extent relative competitive tournaments represent an efficient method for optimal incentive setting so that the respective employees select the optimal level of effort. To do this, they analyzed three different models:

First, Lazear and Rosen investigated a piecework wage model and calculated the optimal effort based on their assumptions. On the basis of these results, they analyzed a tournament model with risk-neutral workers and compared the level of effort there with the previously calculated piece rate wage level. Ultimately, they modified this tournament model to conduct an analysis with two risk averse workers.

In each model, the behavior of the tournament participants was first analyzed based on their expected benefits and cost structures and their strategies, given the strategies of the opponent, examined.

The second model of risk-neutral workers is explained in more detail below.

The framework

First, Lazear and Rosen make the following assumptions about the tournament model. To simplify the analysis, a single-period model is assumed. This excludes any influences such as future worries (career concerns) and also means that all decisions made are valid for a lifetime. Each of the tournament participants selects any level of investment in special skills, such as investment in company-specific human capital , before the tournament begins . However, this investment also entails costs for the respective participants.

Both each have an output that consists of the investment and an unobservable disturbance term . . The distribution is known for both terms, although only the tournament participant knows his own investment level and the employer can therefore only observe the overall output. As a result, the employer does not know whether the high output came about through great effort or whether the tournament participant only had a high level of disturbance and was therefore very lucky. In addition, Lazear and Rosen make further assumptions regarding the model frame. Both the tournament participants and the employer are in a competitive market, with no collusion between the employees. ${\displaystyle \textstyle q_{i}}$ ${\displaystyle \textstyle e_{i}}$ ${\displaystyle \textstyle \theta _{i}}$ ${\displaystyle \textstyle q_{i}=e_{i}+\theta _{i}}$

construction

First of all, two risk-neutral workers are considered, of whom the tournament winner receives the winner's prize and the loser receives the loser's prize . ${\displaystyle \textstyle W_{1}}$ ${\displaystyle \textstyle W_{2}}$

The respective production function is described by. The tournament participant who generates the greatest output wins . Above all, the ordinal order of the generated outputs is essential. This represents a further advantage of the tournament compared to the result-related remuneration, since an exact measurement of the output is not necessary, but it is only put in relation to the output of the tournament opponent. ${\displaystyle \textstyle q_{i}=e_{i}+\theta _{i}}$ ${\displaystyle \textstyle q}$

The backward induction determines those tournament prices that create the best incentives.

The tournament itself follows a certain sequence: First of all, the employer sets the rules and prizes. On the basis of this structure, the agents choose their deployment or investment level, which maximizes their expected benefit. This tournament is analyzed by backward induction . So the employer first sets two arbitrary tournament prices and . Since the zero profit condition applies to the employee due to the assumption of a competitive market, the expected benefit of the tournament participants is maximized in the next step. In the last step, the employer chooses the wages that create the best incentives. ${\displaystyle \textstyle W_{1}}$ ${\displaystyle \textstyle W_{2}}$

It will be seen that the incentive increases with the tournament price difference. The incentive mechanism is as follows: The greater the gap between the two prizes, the greater the opportunity costs of an unsuccessful tournament participation, which is why the agent does not want to lose. However, increasing this price difference also has certain costs (see dangers of relative competitive tournaments ). ${\displaystyle W_{1}-W_{2}}$

The tournament participants

Lazear and Rosen first looked at a tournament model with two risk-neutral tournament participants who compete against each other in an internal competition. For simplicity, it is assumed that tournament participants have the same cost of their investment. Given the assumptions made, the expected utility can be described by the following function: ${\displaystyle \textstyle C(e)}$

${\displaystyle (P)(W_{1}-C(e))+(1-P)(W_{2}-C(e))=PW_{1}+(1-P)W_{2}-C(e)\qquad {\mathtt {(1)}}}$

${\displaystyle \textstyle P}$represents the probability of winning here. The probability that the participant wins is thus: ${\displaystyle \textstyle j}$

${\displaystyle P=\operatorname {prob} (q_{j}>q_{k})}$

as his output has to be greater than that of his opponent to win the tournament.

However, the difference between the investment actually made must also be greater than the “luck” that the opponent has in this case. Otherwise the player actually invests more, but the opponent can compensate for the difference with a lot of luck - expressed here by a high interference term - and thereby win. The probability that the player wins is thus determined by the following equation ${\displaystyle \textstyle e_{j}}$ ${\displaystyle \textstyle j}$ ${\displaystyle \textstyle \theta _{k}}$ ${\displaystyle \textstyle j}$

${\displaystyle P=\operatorname {prob} (q_{j}>q_{k})=\operatorname {prob} (e_{j}-e_{k}>\theta _{k}-\theta _{j})=\operatorname {prob} (e_{j}-e_{k}>\xi )=G(e_{j}-e_{k})\qquad {\mathtt {(2)}}}$

Here now the following assumptions: . Since the disturbance terms are distributed independently and identically , with an expectation of and a variance of . Furthermore, here is the accumulated distribution function of the interference term difference with the associated density function . Thus, the probability that the investment difference is greater than the interference noise difference corresponds to . As a result, the probability of winning depends not only on one's own output but also on the opponent's disruptive term, which must be taken into account in one's own investment decisions. ${\displaystyle \textstyle \xi \equiv \theta _{k}-\theta _{j}}$ ${\displaystyle 0}$ ${\displaystyle \textstyle \sigma ^{2}}$ ${\displaystyle \textstyle G(.)}$ ${\displaystyle \textstyle g(\xi )}$ ${\displaystyle \textstyle G(e_{j}-e_{k})}$

To calculate the optimal investment strategy, the expected benefit of the tournament participant is maximized. Since both employees have the same cost function and their behavior is therefore symmetrical, the expected utility can be expressed as:

${\displaystyle \max(e_{i})PW_{1}+(1-P)W_{2}-C(e_{i})=\max(e_{i})P(W_{1}-W_{2})+W_{2}-C(e_{i}),{\text{ mit }}i=j,k}$

(Important: due to the assumptions in there is also a function of ) ${\displaystyle {\mathtt {(2)}}}$ ${\displaystyle P}$ ${\displaystyle e_{i}}$

According to the 1st order condition :

${\displaystyle {\frac {\partial EU}{\partial e_{i}}}=(W_{1}-W_{2}){\frac {\partial P}{\partial e_{i}}}-C'(e_{i})=0\qquad {\mathtt {(3)}}}$

Since the own tournament success also depends on the decisions of the opponent, each player maximizes his own expected benefit given the strategies of the opponent. After the assumption, the following applies: ${\displaystyle {\mathtt {(2)}}}$

${\displaystyle {\frac {\partial P}{\partial e_{j}}}={\frac {\partial G(e_{j}-e_{k})}{\partial e_{j}}}}$

The reaction function of the player (analogous to the player ) is thus described as: ${\displaystyle j}$ ${\displaystyle k}$

${\displaystyle (W_{1}-W_{2})g(e_{j}-e_{k})-C'(e_{j})=0\qquad {\mathtt {(4)}}}$

Since both players have the same cost function , their behavior is identical. That means they will both choose the same level of investment. Thus applies . Again if this assumption is true, then: . This means that the probability of winning is for each player in pure strategies . ${\displaystyle e_{j}=e_{k}=e}$ ${\displaystyle P=G(e_{j}-e_{k})=G(0)={\frac {1}{2}}}$ ${\displaystyle \textstyle P={\frac {1}{2}}}$

If you put the probability of winning into the reaction function , you get ${\displaystyle {\mathtt {(4)}}}$

${\displaystyle (W_{1}-W_{2})g(0)-C'(e_{i})=0}$

${\displaystyle (W_{1}-W_{2})g(0)=C'(e_{i})}$ With ${\displaystyle \textstyle i=j,k\qquad {\mathtt {(5)}}}$

${\displaystyle {\frac {W_{1}-W_{2}}{2}}=C'(e_{i})}$

Therefore, the optimal choice of investment level depends on the tournament price difference . ${\displaystyle \textstyle e_{i}}$ ${\displaystyle W_{1}-W_{2}}$

The enterprise

The company itself has the following profit function , whereby here represents the value of a unit produced. ${\displaystyle \textstyle V}$

${\displaystyle \Pi =V\cdot Q-C}$,

where:

• ${\displaystyle V\cdot Q=(q_{j}+q_{k})\cdot V}$
• ${\displaystyle C=W_{1}+W_{2}}$

If you put these assumptions in the profit function, the profit for the company is:

${\displaystyle {\text{Gewinn}}=(q_{j}+q_{k})\cdot V-(W_{1}-W_{2})\qquad {\mathtt {(6)}}}$

The assumption of a competitive market also applies, which means that the company does not make a profit. After assuming the zero-profit condition, the following transformation of the equation results ${\displaystyle \textstyle {\mathtt {(6)}}}$

${\displaystyle W_{1}+W_{2}=(q_{j}+q_{k})\cdot V}$

Here it must be noted that in equilibrium, due to the identical cost structure, the agents apply. ${\displaystyle \textstyle q_{j}=q_{k}=q}$

This is now plugged into the equation . ${\displaystyle \textstyle {\mathtt {(6)}}}$

${\displaystyle W_{1}+W_{2}=V\cdot 2e}$

${\displaystyle {\frac {W_{1}-W_{2}}{2}}=Ve\qquad \qquad \qquad \qquad \qquad \qquad {\mathtt {(7)}}}$

The expression is now inserted in the reaction function. It must be noted that in equilibrium . ${\displaystyle {\mathtt {(7)}}}$ ${\displaystyle {\mathtt {(1)}}}$ ${\displaystyle \textstyle P={\frac {1}{2}}}$

${\displaystyle PW_{1}+(1-P)W_{2}-C(e)\quad \left|P={\frac {1}{2}}\right.}$

${\displaystyle {\frac {1}{2}}W_{1}+{\frac {1}{2}}W_{2}-C(e)\quad \left|{\frac {W_{1}+W_{2}}{2}}=Ve\right.\quad {\mathtt {(8)}}}$

${\displaystyle V(e)-C(e)\qquad \qquad \qquad \qquad \qquad \quad {\mathtt {(9)}}}$

The latter expression is now maximized to calculate the optimal investment amount of the agents. ${\displaystyle \textstyle e}$

${\displaystyle \mathrm {max} _{e}Ve-C(e)=V-C'(e)=0}$

Thus:

${\displaystyle V=C'(e)}$

conclusion

As a first step, Lazear and Rosen calculated the value of the production unit of a company with the same cost structure with piece wages without information asymmetry in order to show a comparable first-best solution. The piece rate result agrees with this result. Thanks to the tournament solution, the first-best solution can be implemented despite information asymmetry. This shows one of the strengths of the tournament solution compared to output-dependent remuneration schemes. In situations in which the output cannot be specifically measured due to information asymmetries, tournaments have a great advantage, since only the ordinal ranking plays a role here. This eliminates the need for costly measurement costs, which is why this remuneration option is far more cost-effective for the company and still provides sufficient incentives for the agents.

Extension of the model

Tournament variants

The tournament model from Lazear and Rosen has been continuously developed and modified over the years, so that today there are many different reward systems and tournament variants.

The models explained in the following examples have prevailed in reality and are the most common competitive tournaments in business. In the first variant, the principal sets two prices. and , where is the winning prize and is accordingly> . The award is made through a job or rank-based remuneration. This scheme is first referred to by Kräkel as the U-Type, as this form of competitive tournament is often used in the USA. A popular example of this would be the promotion tournament. The winner receives the promotion to a higher level / hierarchy and the corresponding increase in salary , while the loser receives an increase in his salary despite not being promoted . Determining the prizes and their difference is the first stage in the competitive tournament. In the second stage, the agent then chooses his personally optimal level of effort in order to maximize his net income. ${\displaystyle W_{1}}$ ${\displaystyle W_{2}}$ ${\displaystyle W_{1}}$ ${\displaystyle W_{2}}$ ${\displaystyle W_{1}}$ ${\displaystyle W_{2}}$ ${\displaystyle e_{k}}$

In the second variant, the principle of remuneration is not job-related, but person-related. This form is called J-Type by Kräkel because it is mainly used in the Japanese region. In the first stage, a collective sum is specified that is available as a bonus payment for the agents. As part of a performance appraisal system , each agent can increase their share of the company's profit through high work performance, innovative suggestions for improvement and investment in their company-specific human capital in order to receive more from the bonus payment. In other words, if agent k performs twice as much as agent j, agent k also receives double the bonus payment. Thus, the employee with the best job performance receives the largest share of the bonus payment and is declared the winner of the tournament. Each agent decides his individual level of effort in level two for himself. ${\displaystyle W_{}}$

Common ground

Both models have a common starting point, which is based on the original model.

As explained before, each agent generates an output . He can either be successful and the output achieved or not be successful and the output with realize. The outputs can be observed by all three participants, but not verifiable and therefore not contractable. Principal proclaims failure in principle with to lower his wage costs. Since the rationally thinking agents know this, they only make a minimal effort. It is also assumed that the agents can choose their level of exertion in an interval between 0 and 1 -> , ϵ (0,1). ${\displaystyle \textstyle q}$ ${\displaystyle \textstyle q_{h}}$ ${\displaystyle \textstyle q_{l}<q_{h}}$ ${\displaystyle \textstyle q_{l}>0}$ ${\displaystyle q_{l}}$ ${\displaystyle e_{k}}$ ${\displaystyle e_{j}}$

Employees realize a success with a probability ( ) and a failure with the opposite probability . It is assumed that both agents have the same work suffering or cost function (measured in monetary values) of with and ( ). This results in a symmetrical choice of the effort levels. The monetary reservation price is V≥0 for both. Agent k and j are therefore not subject to any limited liability . Tournament prices or wages can be negative as desired. ${\displaystyle k(j)}$ ${\displaystyle e_{k}}$ ${\displaystyle e_{j}}$ ${\displaystyle \textstyle 1-(e_{k})}$ ${\displaystyle \textstyle (1-(e_{j})}$ ${\displaystyle \textstyle c(e_{i})}$ ${\displaystyle c>0}$ ${\displaystyle i=k,j}$

U-type

Since the job-related remuneration and the filling of the "new" position with internal applicants can be checked directly by a third party, the U-Type tournament is verifiable and therefore contractable. This creates a credible self-commitment on the part of the principal, which is why he can no longer save wage costs through an opportunistic performance appraisal. In the U-Type model, there is a winning prize and a losing prize . In the first step the agent k maximizes its net income, which corresponds to the expected utility. Agent j is analogous to this. The expected benefit consists of four parts: In the first part, agent k realizes the higher output and is thus the winner of the tournament . In the second and third part, the output of both agents is identical, since they were both equally successful or unsuccessful. The toss of a fair coin decides who is the winner or who is the loser. In the last part, agent k receives the loser's prize because he has a lower output than agent j and thus loses the tournament. In order to now calculate the optimal effort, the agent maximizes its expected utility via the first-order condition ( BEO ). This is what is known as the incentive condition. The calculated result is the same for both agents and is therefore symmetrical. Since both agents are trying to the same extent, they have an optimum probability of winning of ½. As the winner's price increases, so does the level of effort. Conversely, the work effort decreases as the loser price increases, since this represents the agent's fallback position in the case of zero effort. Thus, only the increase in the tournament price difference will motivate both tournament participants to try harder (incentive screw). In the next step, the principal maximizes the expected total output minus labor costs. He does this under the additional condition that the participants accept the proposed remuneration and take part in the tournament. It is the condition of acceptance. In addition to the “incentive screw” effect, there is another aspect, which is why the principal should keep the loser price as low as possible. Namely, to keep his wage costs as low as possible. The principal will choose the loser price so low that the acceptance condition is still binding. This binding acceptance condition is then inserted into the principal's objective function. To calculate the optimal ΔW, the function is derived again (BEO). In the last step, the new result is then inserted into the incentive condition in order to get the final effort level . The principal sets the tournament price difference in the optimum so that the first-best solution is also induced at the same time. The interpretation of the whole thing would be that the principal chooses the loser price exactly in such a way that the participants are pressed on their respective reservation benefits, since these are not protected by limited liability. There are no incentive problems due to risk aversion . All first-best welfare gains accrue to the principal, who now adjusts the “incentive screw” ΔW so that the common welfare of all participants is maximized. Finally, you can explicitly determine the optimal tournament prices via the optimal tournament price difference and the binding acceptance condition. ${\displaystyle W_{1}}$ ${\displaystyle W_{2}}$ ${\displaystyle W_{1}}$ ${\displaystyle W_{2}}$ ${\displaystyle e_{US}^{*}}$

J-type

Similar to the U-Type tournament, the agent maximizes his net income through his labor. The agent k receives the portion of the wage bill that he has earned relative to his colleagues. Thus, the agent who generates the highest output receives the largest share of the wages. If both generate the same output, the wages are divided among the agents as it were. Just like in the U-Type tournament, the participants choose the same level of effort. The principal can set the collective wage bill W here specifically in order to adjust the incentives for the tournament participants. By choosing the collective wage bill, the principal maximizes his expected profit, taking into account the incentive condition and the acceptance condition. Compared to the U-Type variant, the decisive difference here is that the principal has no winner or loser price, but only a collective wage bill with which he can control and intervene. Nor can he skim off all pensions for himself.

Advantages and disadvantages of the tournament variants

Which model an entrepreneur should choose depends on certain criteria. Some criteria are set out below.

1. Number of tournament participants:
   If there are only two agents, as assumed in the above calculations, the U-type model will dominate, as the direct comparison between two participants assumes more effort by the respective agents. As soon as the number increases, however, i.e. n <2, the J-type model dominates. As the number increases, the probability of winning in the U-Type model decreases. The agents lose motivation and are no longer trying hard enough. In the J-Type model, however, every effort is worthwhile, since every contribution, no matter how small, leads to an improvement in his wages .
2. Collusion :
   This is the internal agreement of the agents to hold back on the respective service. The J-type model has a lower collusion stability. Because if all agents agree to keep their performance low, it is worthwhile for each individual to deviate from this agreement, since the expected wage bill for the J-Type is greater than that of the U-Type. With the smallest deviation, the agent could get a higher wage bill than in the U-Type.
3. Investment in human capital :
   The J-Type model dominates here. If an agent in the U-Type tournament has more company-specific human capital than his opponent, the probability that he will win the tournament is also higher. The participant with the lower human capital loses motivation and holds back with his performance, while in the J-Type every performance counts and is worthwhile again. The employee is motivated to the end, regardless of the size of his company-specific human capital.
4. Competitive situation :
   As can be seen from the first point (number of tournament participants), the J-Type model also dominates here. The higher the number of participants, the lower the probability for each individual to win the U-Type tournament. Motivation drops and performance drops, while in the J-Type model it remains constant.

Dangers of relative performance tournaments

Relative performance tournaments are particularly advantageous when there are asymmetrical information problems. However, this remuneration scheme also carries certain risks. Two of these risks are sabotage and rat races.

sabotage

Due to the difference in tournament prices, the participants have incentives to set themselves apart from their competitors through better performance. However, the structure of relative performance appraisal also offers workers different opportunities to use their resources.

So the tournament can be won by the participants in two different ways. For one thing, they can try harder, i. H. Show more effort or invest more in company-specific human capital . On the other hand, they can also negatively influence the output of their fellow campaigner in order to increase their own output in relative terms. In this way, they not only benefit directly from their own work success, but also from the failure of their fellow campaigners .

If the efforts to negatively influence the output of the other through sabotage or bullying are less than those to increase one's own output, the incentive or the risk of sabotage is high. Sabotage and bullying can manifest themselves in many ways. Withholding relevant information or spreading rumors alone can hinder fellow campaigners. Sabotage also poses an economic problem: the opponent's output is reduced without increasing one's own output, as part of the resources is used for sabotage. This reduces the overall output, which has negative consequences for the overall success of the company.

causes

In the case of sabotage-prone tournaments, the agents can win the tournament by increasing their workload as well as through greater sabotage activities.

As explained in the models above, the principal wants to motivate the agents to work harder. He controls this, for example, in the U-Type tournament by means of the wage price difference.

However, a large tournament price difference is also the main problem with sabotage. A large tournament price difference creates great incentives for the agents to make an effort, but also increases the opportunity costs in the event of an unsuccessful tournament participation. Thus, the sabotage efforts also depend on the tournament price difference. In other words, the greater the difference in tournament prices, the greater the risk of sabotage.

In relation to a job-related tournament variant, this shows that the difference between the salary levels of different hierarchical levels causes the increased incentive for ineffective work in the form of sabotage or overexertion (see rat race). Since a relative competitive tournament also reduces the incentive to work in a team, Lazear demands that tournaments only be held where teamwork and cooperation are not necessary for the company's profit.

Countermeasures

As a possible countermeasure, the tournament price difference can be reduced, which directly reduces the incentive to sabotage. However, such a reduction is also associated with a reduction in the productivity incentive, since this is also conveyed via the difference. The company must therefore weigh up in each case whether it accepts sabotage for optimal work incentives or whether the costs of sabotage outweigh the costs and whether it lowers the price difference in order to reduce the effects of sabotage.

Sabotage is also prohibited in companies. The company could therefore continue to invest in detection mechanisms to sanction sabotage activities accordingly. This would directly affect the effectiveness of the sabotage efforts. In addition, the sabotage can be influenced to the effect that the tournament participants are spatially separated from one another in order to prevent mutual interference. This would also increase the effort involved in sabotage - that is, the sabotage costs.

However, the cost-saving form of the relative assessment is a great advantage of the tournament variant, since hardly any costs have to be invested in observing the participants. Monitoring costs to uncover sabotage would contradict this argument.

Rat Races

Another problem of the relative performance tournaments is the rat race.

The term rat race describes the phenomenon that two workers, intending to outbid each other, keep increasing their efforts until their high level of effort or the costs involved are no longer in any relation to the actual price.

This phenomenon occurs particularly where participants compete for “indivisible and therefore scarce positions” ( Franck E., Müller JC (2000), 3 ). The shortage means that the "price" continues to rise, creating a very high incentive for the agents.

There are two main types of rat racing. In the first race, also known as the signal race, the employer cannot directly observe the characteristics such as talent . Thus, the participants try to differentiate themselves from the tournament opponent through excessive effort in order to prove their higher talent. The second race is a position race, in which a relative performance comparison of the tournament participants takes place. This leads to the fact that the participants try to outbid each other through higher stakes in order to receive the winning price.

Costs arise here both for the employer, since a loss of benefit arises as a result of the downright wasteful use of resources , and for the participants, since they can suffer health damage from the overexploitation of their resources, among other things .

Another problem arises when workers no longer have the same cost structure or technology. For example, an agent who is too weak can refrain from competing with an obviously stronger participant, as he himself no longer derives any positive benefit from the race due to the high costs of the effort . As a result, the intended incentives of the tournament are lost.

causes

Provided that the selected level of exertion can determine the tournament result, an excessively high tournament price difference is also a possible cause. This creates too strong incentives, so that employees opt for an inefficiently high level of effort.

Another possible cause is a job cut. If jobs are lost, the difference in wages between two jobs can increase to such an extent that the opportunity costs rise sharply in the event of an unsuccessful participation in the tournament. The increased desire to keep the higher position leads to a less than optimal choice of exertion.

Countermeasures

Similar to sabotage, the employer can also take various measures to successfully prevent a rat race. There is also the possibility of a spatial separation of the participants. In addition, a reduction in the tournament price difference can also prevent a rat race, in which case, in turn, a reduction in the incentive mechanism must be accepted.

The employer can also control the composition of the tournament participants in a targeted manner in order to achieve the desired effects. So he can first let the tournament participants with similar technology or strengths compete against each other in order to organize a fair competition. Another option is the handicap solution, in which the tournament winner has to beat the opponent by a certain minimum distance in order to be certain of the winner's price. This continues to create incentives for the stronger participant and at the same time encourages the weaker participant to continue to compete with the stronger opponent.

In this way, the employer can target the dangers of the model, so that the tournament is a good alternative as a remuneration scheme for asymmetrical information.

swell

literature

• Akerlof, George (1976): The Economics of Caste and of the Rat Race and Other Woeful Tales , The Quarterly Journal of Economics, Vol. 90, No. 4, p. 603.
• Franck, Egon / Müller, J. Christian (2000): Problem structure, escalation requirements and escalation-promoting condition for so-called rat races , Schmalenbach's Journal for Company Research, Volume 52, Issue 1, pp. 3–26.
• Yoshitsugu Kanemoto and W Bentley MacLeod (1991): The Theory of Contracts and Labor Practices in Japan and the United States , Managerial and Decision Economics, Vol.12, No.2, pp. 159-170.
• Kräkel, Matthias (1991): Organization and Management , Thübingen, Mohr Siebeck Verlag, 5th edition 2012.
• Kräkel, Matthias / Schauenberg, Bernd (1994): rat races and promotions , economics studies, 23rd year, p. 230 .; quoted According to Franck, Egon / Müller, J. Christian (2000): Problem structure, escalation requirements and escalation-promoting condition of so-called rat races , Schmalenbach's Journal for Company Research, Volume 52, Issue 1, p. 13.
• Lazear EP, Rosen S. (1981): Rank-Order Tournaments as Optimum Labor Contracts , Journal of Political Economy, Vol. 89, No. 5, pp. 841-864.
• Lazear, Edward P. (1989): Pay Equality and Industrial Politics , Journal of Political Economy, Vol.97, No.3, pp. 561-580.
• Lutz, Sabine (2009): Relative competitive tournaments in human resource management. Pros and cons , Hamburg, Diplomica Verlag GmbH.
• Rosen, Sherwin (1988): Promotions, Elections and Other Contests , Journal of Institutional and Theoretical Economics, No.1 The New Institutional Economics: Some Perspectives on Contractual Relations, pp. 73-90.
• Anja Schöttner (2005): Precision in U-Type and J-Type Tournaments , Schmalenbach Business Review, Vol.57, pp. 167–192.
• Jerry R. Green and Nancy L. Stokey (1983): A Comparison of Tournaments and Contracts , Journal of Political Economy, Vol.91, No.3, pp. 349-364.

Individual evidence

1. ↑ Lutz, Sabine: Relative performance tournaments in personnel management. Advantages and disadvantages , Hamburg, Diplomica Verlag GmbH 2009
2. ↑ ^{a b} Kräkel, Matthias: Organization und Management , Thübingen, Mohr Siebeck Verlag, 5th edition 2012, p. 87.
3. ↑ ^{a b} Rosen, Sherwin (1988): Promotions, Elections and Other Contests , Journal of Institutional and Theoretical Economics, No.1 The New Institutional Economics: Some Perspectives on Contractual Relations, pp. 73-90
4. ↑ ^{a b c d e f g} cf. Lazear EP, Rosen S. (Oct. 1981): Rank-Order Tournaments as Optimum Labor Contracts , Journal of Political Economy, Vol. 89, No. 5, pp. 841-864
5. ↑ ^{a b} Anja Schöttner: Precision in U-Type and J-Type Tournaments , Schmalenbach Business Review, Vol.57, pp. 167–192
6. ^ Kräkel, Matthias: Organization and Management , 5th edition, Mohr Siebeck Tübingen, pp. 102-106
7. ^ ^{A b} Kanemoto and MacLeod: The Theory of Contracts and Labor Practices in Japan and the United States , Managerial and Decision Economics, Vol. 12, pp. 159-170
8. ↑ Green and Stokey: A Comparison of Tournaments and Contracts , Journal of Political Economy, Vol. 91, pp. 349-364
9. ^ Kräkel, Matthias: Organization and Management , 5th edition, Mohr Siebeck Tübingen, pp. 107–114
10. ↑ ^{a b c d e} cf. Lazear, Edward P. (1989): Pay Equality and Industrial Politics , Journal of Political Economy, Vol.97, No.3, pp. 561-580
11. ↑ ^{a b c d} see: Kräkel, Matthias (1999): Organization und Management , Thübingen, Mohr Siebeck Verlag, 5th edition 2012, pp. 234–242
12. ^ ^{A b c} Franck E., Müller JC (2000): Problem structure, escalation requirements and escalation-promoting condition of so-called rat races , Schmalenbach's Journal for Company Research, Volume 52, Issue 1, pp. 3–26
13. ↑ ^{a b} Kräkel, Matthias (1999): Organization and Management , Thübingen, Mohr Siebeck Verlag, 5th edition 2012, pp. 242–250
14. ↑ Franck, Egon / Müller, J. Christian (2000): Problem structure, escalation requirements and escalation-promoting condition of so-called rat races , Schmalenbach's Journal for Company Research, Volume 52, Issue 1, p. 3.
15. ↑ Kräkel, Matthias / Schauenberg, Bernd (1994): Rattenrennen und promotions , economic studies, 23rd year, p. 230 .; quoted According to Franck, Egon / Müller, J. Christian (2000): Problem structure, escalation requirements and escalation-promoting condition of so-called rat races , Schmalenbach's Journal for Company Research, Volume 52, Issue 1, p. 13.
16. ↑ Akerlof, George (1976): The Economics of Caste and of the Rat Race and Other Woeful Tales , The Quarterly Journal of Economics, Vol. 90, No. 4, p. 603