The value of commitment in contests and tournaments when observation is costly

We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader’s behavior. In a contest, the follower can pay to observe the leader’s e¤ort but cannot observe the e¤ectiveness of that e¤ort. In a tournament, the follower can pay to observe the e¤ectiveness of the leader’s e¤ort but not the e¤ort itself. We show that this distinction matters signi…cantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are su¢ ciently small. JEL Classi…cation Nos.: H10 Keywords: Contests, Tournaments, Rent-Seeking, Commitment, Costly Leader Games We are grateful to Michael Baye, Burkhard Drees, and Jason Snyder for helpful comments. The …rst author thanks the International Monetary Fund Institute for its generous hospitality and inspiration during the …rst draft of this paper. Morgan also gratefully acknowledges the …nancial support of the National Science Foundation. yAddress all correspondence to Morgan at Haas School of Business, Berkeley, CA 94720-1900. E-mail: [email protected].