Favoring the Winner or Loser in Repeated Contests

Should a rm favor a weaker or stronger employee in a contest? Despite a widespread emphasis on rewarding the best employees, managers continue to tolerate and even favor poor performers. Contest theory reveals that evenly matched contests are the most intense, which implies that a contest designer can maximize each player's e ort by arti cially boosting the underdog's chances. We apply this type of handicapping to a two-period repeated contest between employees, in which the only information available about their abilities is their performance in the rst-period. In this setting, employees are strategic and forward looking, such that they fully anticipate the potential impact of the rst-period contest result on the second period contest, and thus adjust their behaviors accordingly. The manager also incorporates these strategic behaviors of employees when determining an optimal handicapping policy. If employees' abilities are su ciently di erent, favoring the rst-period loser in the second period increases total e ort over both periods. However, if abilities are su ciently similar, we nd the opposite result occurs: total e ort increases most in response to a handicapping strategy of favoring the rst-period winner.