Heterogeneity in Tournaments: An Experimental Analysis

*Bob Hammond
Economics, North Carolina State University

Xiaoyong Zheng
Agricultural and Resource Economics, North Carolina State University

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     Last modified: November 29, 2010
     Presentation date: 03/12/2011 10:45 AM in NH 1120, Session A
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Abstract
Virtually all tournaments in the field are contests among players with unequal abilities. When players have different abilities, cardinal, ordinal, and piece rate tournaments incentivize players differently with respect to the degree of heterogeneity among players' abilities. We use a laboratory experiment to test recent theoretical predictions concerning the relationship between heterogeneity among players' abilities and effort levels in tournaments. In particular, larger variance (more heterogeneous players) induces higher optimal effort in the piece rate tournament, while the variance in abilities does not affect the level of effort exerted in equilibrium in cardinal or ordinal tournaments. This paper is the first attempt within a laboratory environment to estimate the role of heterogeneity among contests' abilities in cardinal, ordinal, and piece rate tournaments. Since our experimental data carefully control for the underlying economic environment, we are able to cleanly quantify the welfare effects of heterogenizing tournament groups. This approach identifies the profit-maximizing business strategy by determining whether companies should pay for performance based on a cardinal, ordinal, or piece rate tournament and whether tournaments should be among heterogeneous or homogeneous players.