Tournaments with Gaps

Lorens Imhof and Matthias Kräkel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament.

Keywords: limited liability; moral hazard; risk aversion; tournament; unlimited liability (search for similar items in EconPapers)
JEL-codes: C72 D86 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hrm and nep-mic
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Journal Article: Tournaments with gaps (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:411

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