The Optimality of Heterogeneous Tournaments

Marc Gürtler and Oliver Gürtler

Journal of Labor Economics, 2015, vol. 33, issue 4, 1007 - 1042

Abstract: We investigate the effect of employee heterogeneity on the incentive to exert effort in a market-based tournament. External employers use promotion decisions to estimate employees' abilities and adjust their wage offers accordingly. Employees exert effort to increase the probability of being promoted and thus to increase their ability assessment and wage offer. We demonstrate that ability assessments and wage offers are more sensitive to promotion decisions in the case of heterogeneous employees. Thus, employees have a higher incentive to affect the tournament outcome, and employers find it optimal to hire heterogeneous employees.

Date: 2015
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