Relative performance schemes under non-equilibrium beliefs. Experimental evidence and consequences for the design of tournaments

• Applicants: Dr. Tobias Brünner; Professor Dr. Guido Friebel
• Subject Area: Economic Theory
• Term: from 2013 to 2014
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 230781762

Firms are increasingly facing the challenge to identify talented workers, and to give them the right incentives to stay with the firm. One important instrument to achieve this goal are relative performance schemes where the decision to grant a bonus or to promote the worker is not based on an absolute target but on whether he or she is the most productive worker in the group or not. Although many theoretical studies highlight the positive effects of tournaments on incentives, experimental studies provide a different picture: Participants respond quite differently to tournament incentives. Some provide too much effort, others do not work at all. This bifurcation of workers in workaholics and dropouts can also be observed in firms and it often results in adverse outcomes that countervail the positive intentions of tournaments. In this project we explain the experimental results by relaxing the assumption that participants have equilibrium beliefs about other participants' effort choices. With a better understanding of the participants' behaviour we will then design new tournaments that lead to desirable outcomes under non-equilibrium beliefs. In this project we will employ both theoretical as well as experimental methods.

• DFG Programme: Research Grants
• International Connection: France
• Participating Person: Professorin Marie Claire Villeval, Ph.D.