Social Loss Aversion and Optimal Contest Design

When designing a contest to motivate effort by salespeople, service employees, franchisees or product development teams, one of the key questions faced by managers is: What should be the optimal proportion of winners and losers? Prevailing marketing theory predicts that the proportion of winners in a contest should always be lower than the proportion of losers. Not only has this theory not been empirically tested, it is also based on the assumption that contestants care solely about the value of the prizes they receive. This selfinterested assumption has been increasingly challenged in marketing and economics. This paper uses a behavioral economics model to formalize the idea that if contestants also care about their contest outcomes relative to other contestants, changing the proportion of winners in a contest can alter the reference points that contestants use to make these social comparisons. Consequently, a contest with a higher proportion of winners than losers can yield greater effort than one with fewer winners than losers if the degree of social loss aversion in the contestants is sufficiently strong. Two incentive-aligned experiments show that this prediction can be valid in situations with public announcements of contest outcomes.