Do Tournaments Have Incentive Effects?

Abstract

Much attention has been devoted to studying models of tournaments or situations in which an individual's payment depends only on his or her output or rank relative to that of other competitors. Academic interest derives from the fact that under certain sets of assumptions, tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test whether tournaments actually elicit effort responses. We focus on professional golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players' scores) are both available. We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance. Much attention has been devoted to studying models of tournaments or situations in which an individual's payment depends only on his or her output or rank relative to that of other competitors. Academic interest derives from the fact that under certain sets of assumptions, tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test whether tournaments actually elicit effort responses. We focus on professional golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players' scores) are both available. We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance.

The puzzle of monogamous marriage

“…These decision-theoretic models [47], which hinge on the same logic as our evolutionary approach [48], predict that even those who perceive themselves as winning or likely to win often need to pursue somewhat riskier strategy when incentive gradients (analogous to fitness gradients) are steeper, because they know that those who are currently losing will be pulling out all the stops. Empirically, field evidence from mutual funds, golf [49,50], auto-racing, distance running, basketball and poker shows that probable losers take more risks, and that both the size and spread of monetary prizes predict riskier choices by everyone [51]. Mutual fund managers [52,53], for example, who find their fund's performance behind other funds in the same category at mid-year, reallocate into riskier portfolios relative to those who did well in the first half of the year (a fund's ranking influences capital inflow, which influences managers' compensation).…”

Institutional Interest in Corporate Responsibility: Portfolio Evidence and Ethical Explanation

“…mutual funds -or involve their investment managers in competition with others -e.g. external fund management of pension fund assets (Acker and Duck, 2006;Chen and Penacchi, 2001;Chevalier and Ellison, 1997;Ehrenberg and Bognanno, 1990;Goriaev et al, 2000;Khorana, 2001;Meyer and Vickers, 1997). A propensity to sell a firm based on short-term developments indicates preferences for low-cost fulfilment of trades and high market liquidity.…”

Executive pay dispersion, corporate governance, and firm performance

“…For example, Ehrenberg and Bognanno (1990) examine the performance of golfers and conclude that as prize differentials increase, players' performance improves. Becker and Huselid (1992) examine the performance of drivers in professional auto racing, and report that pay dispersion has positive incentive effects on both individual performance and driver safety.…”

“…Supporting evidence comes from studies of sport activities (Ehrenberg and Bognanno 1990;Becker and Huselid 1992) and by controlled experiments (Bull et al 1987). In business settings, Main et al (1993), using survey data for top executives in 200 US firms, during 1980200 US firms, during -1984 report that a greater spread of top-executive compensation is positively related to firm performance.…”