Fairness and Desert in Tournaments

David Gill and Rebecca Stone

Discussion Paper Series In Economics And Econometrics from University of Southampton, Economics Division, School of Social Sciences

Abstract: We model the behaviour of agents who care about receiving what they feel they deserve in a two-player rank-order tournament. Perceived entitlements are sensitive to how hard an agent has worked relative to her rival, and agents are loss averse around their meritocratically determined endogenous reference points. In a fair tournament sufficiently large desert concerns drive identical agents to push their effort levels apart in order to end up closer to their reference points on average. In an unfair tournament, where one agent is advantaged, the equilibrium is symmetric in the absence of desert, but asymmetric in the presence of desert. We find that desert concerns can undermine the standard conclusion that competition for a fixed supply of status is socially wasteful and explain why, when the distribution of output noise is fat-tailed, an employer might use a rank-order incentive scheme.
Keywords; Desert, Equity, Tournament, Loss Aversion, Reference-Dependent Preferences, Reference Point, Psychological Game Theory, Status, Relative Performance Evaluation
JEL Classification: D63, J33

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