Fairness and desert in tournaments

We model the behavior of agents who, in competitive situations, care about receiving their “just deserts”, i.e., what they feel they deserve. In particular we analyze the strategic behavior of two identical desert-motivated agents in a rank-order tournament. Each agent is assumed to be loss averse about an endogenous and meritocratically determined reference point that represents her perceived entitlement. Su¢ ciently strong desert concerns render the usual symmetric equilibrium unstable or non-existent and allow asymmetric desert equilibria to arise in which one agent works hard while the other slacks o¤. By pushing their e¤ort levels apart, the agents end up closer to their reference points on average. As a result, agents may prefer competition for status or rank to a random allocation, even though the supply of status/rank is …xed. We also …nd that when employees are desert-motivated, but continue to play a symmetric equilibrium, an employer will prefer a tournament to a linear relative performance pay scheme if output noise is su¢ ciently fat-tailed.