Tournament for Belief and Optimal Uncertainty

Illoong Kwon
Graduate School of Public Administration, Seoul National Uni

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     Last modified: February 22, 2011
     Presentation date: 03/13/2011 10:15 AM in NH 1140, Session C
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Abstract
This paper considers a tournament where the winner is decided by the principal's posterior belief on the agents’ ability, not necessarily by the agents' performance. Contrary to the previous studies, this paper shows that the agents' optimal choice of uncertainty is finite. If the uncertainty is infinite, the agent's performance or effort would have no effect on the principal's posterior belief. Therefore, promotion decisions based on a manager's subjective performance rating can reduce the choice of risky strategies by the agents. This paper also shows that the principal's optimal choice of uncertainty is strictly positive.