The Optimality of Heterogeneous Tournaments

We investigate the e¤ect of employee heterogeneity on the incentive to put forth e¤ort in a market-based tournament. Employers use the tournament’s outcome to estimate employees’ abilities and accordingly condition their wage o¤ers. Employees put forth e¤ort, because by doing so they increase the probability of outperforming the rival, thereby increasing their ability assessment and thus the wage o¤er. We demonstrate that the tournament outcome provides more information about employees’abilities in case they are heterogeneous. Thus, employees get a higher incentive to a¤ect the tournament outcome, and employers …nd it optimal to hire heterogeneous contestants. Keywords: Tournament, competitive labor market, heterogeneity, learning JEL classi…cation: D83, J24, J31, M51 Marc Gürtler, Department of Economics, Braunschweig Institute of Technology, Abt-Jerusalem-Str. 7, D-38106 Braunschweig, Germany. Phone: +49-531-3912895; E-mail: [email protected] Oliver Gürtler, Department of Economics, University of Cologne, Albertus Magnus Platz, D-50923 Cologne, Germany. Phone: +49-221-4701450; E-mail: [email protected]