 Tournaments as a response to ambiguity aversion in incentive contractsJournal of Economic Theory, 2015, vol. 159, issue PA, 627-655 Abstract: We study a principal–agent problem with multiple identical agents, where the action-dependent stochastic relationship between actions and output is perceived to be ambiguous, and agents are ambiguity averse. We argue that ambiguity, and particularly ambiguity aversion, make it more attractive for the principal to choose a tournament. If agents are risk neutral, but ambiguity averse, we show that the set of optimal incentive schemes contains a tournament. Moreover, if ambiguity is rich enough, all optimal incentive schemes must be such that realized output levels affect only the distribution of wages across agents and not the total wages paid out, as it is true for tournaments. When agents are both risk averse and ambiguity averse, tournaments need not be optimal, but ambiguity and ambiguity aversion still favor, in many cases, the use of tournaments or tournament-like schemes over e.g. incentive schemes that only depend on each agent's own output level. Keywords: Ambiguity aversion; Incentive contracts; Tournaments (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:159:y:2015:i:pa:p:627-655 DOI: 10.1016/j.jet.2015.08.002 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.