Strive to be first or avoid being last: An experiment on relative performance incentives

Managers often use tournaments which motivate workers to compete for the top, compete to avoid the bottom, or both. In this paper we compare the e¤ectiveness and e¢ ciency of the corresponding incentive schemes. To do so, we utilize optimal contracts in a principal-agent setting, using a Lazear-Rosen type model that predicts equal e¤ort and e¢ ciency levels for the three mechanisms with the appropriate distribution of prizes. We test the model’s predictions in a laboratory experiment and …nd that a mechanism which incorporates both competition for the top and away from the bottom produces the highest e¤ort from agents, especially in contests of a relatively larger size. Avoiding being last is shown to produce the lowest variance of e¤ort, be more e¤ective and, in larger contests, more e¢ cient than competing for the top. Finally, we show that behavior in all mechanisms is consistent with basic directional and reinforcement learning. JEL Codes: M52 J33 J24 D24 C90 Keywords: tournament, reward, punishment, promotion, …ring, contract, experiment, learning yFinancial support from the Austrian Science Fund (FWF) through project P22772-G11 is gratefully acknowledged. We would also like to acknowledge the useful feedback received from seminars at the University of Texas Dallas, the University of Innsbruck, the University of Linz and MPI Munich as well as participants at the 2012 Economic Science Association Meetings in New York and Tucson, the French Experimental Economics Association Meeting in Montpellier and the Southern Economics Association in New Orleans. zCorresponding author: Department of Public Finance, University of Innsbruck, Universitaetsstrasse 15, A-6020 Innsbruck Austria, [email protected] University of Innsbruck. xFlorida State University. {University of Gothenburg.