Dr. Glenn Dutcher
Dr. Glenn Dutcher, Assistant Professor of Economics at Ohio University, published “Strive to be first or avoid being last: An experiment on relative performance incentives” in the Nov. 15 issue of Games and Economics Behavior.
People regularly compete with others. For instance, within a firm, only the best employee will get promoted. Assuming higher effort leads to more promotions, the potential to get promoted provides incentives for employees to work really hard. “We can call this a promotion tournament. Prior tests of economic theory focused solely on this type of tournament and found the basic tenets to be true,” says Dutcher.
“However, if we look at firm behavior, we also observe that the worst employee’s are fired or demoted. This demotion tournament should also provide incentives for employees to work really hard. The reason most papers focused only on promotion tournaments was because standard economic theory predicts equal effort in a promotion and a demotion tournament as long as the expected payoff to the employee is the same in both. What we wanted to understand is if this is true; ie., we wanted to test the proposition of equal effort in a promotion and demotion tournament. To be more in line with observed firm behavior, we also used a combined payment scheme where some employees were promoted, some were demoted and some were kept at the status quo,” he adds.
“To do so, we allow people to compete with others in a contest. Our main interest revolves around how they compete in a promotion vs. a demotion contest vs. a combination of the two. To carefully control the environment and give the theory it’s best chance to succeed, we conducted our study in a controlled laboratory setting where the participants’ choices were tied to actual monetary outcomes; the better they did, the more money they could make.
“We found that the standard tournament model used for the past 30+ years does not do a good job of predicting behavior. The scheme which combined both the promotion and demotion tournament resulted in the highest effort. This study is a valuable contribution to the economic literature because it challenges the standard theory and provides insights into how these kinds of tournaments should be modeled going forward.”
His co-authors are Loukas Balafoutas, Florian Lindner, Dmitry Ryvkin, and Matthias Sutter.
Abstract: We utilize a laboratory experiment to compare effort provision under optimal tournament contracts with different distributions of prizes which motivate agents to compete to be first, avoid being last, or both. We find that the combined tournament contract incorporating both incentives at the top and at the bottom induces the highest effort, especially in larger groups. Avoiding being last produces the lowest variance of effort and is more effective at motivating employees compared to competing for the top.
Comments