Abstract
AbstractCompetition between heterogeneous participants leads to low‐effort provision in contests. A principal can divide her fixed budget between skill‐enhancing training and the contest prize. Training can reduce heterogeneity, increasing effort. It also reduces the contest prize, making effort fall. We set up an incomplete‐information contest with heterogeneous players and show how this trade‐off is related to the size of the budget of an effort‐maximizing principal. A selection problem arises implying a cost associated with a win by the inferior player. The principal has a larger incentive to train the laggard, reducing the prize on offer.
Highlights
How should an employer get the most out of her work force? how should a research council get the most out of researchers? The standard answer in many such contexts is: set up a contest with a prize to the winner – like a promotion or a research grant
What if leveling the playing field is costly? In such cases, the contest organizer might have to trade off the prize to the winner with spending resources on training the contestants so that they are both better equipped to put in effort in the contest and more interested in doing so
We address the question of how to find the best balance between prize and training in a setting where a principal organizing a contest has a fixed budget that she can split between a prize, which will incentivize the contestants to put in more effort, and skill‐improving training, which will make the effort put in by a contestant more productive
Summary
How should an employer get the most out of her work force? how should a research council get the most out of researchers? The standard answer in many such contexts is: set up a contest with a prize to the winner – like a promotion or a research grant. When the budget is large, the principal decides to train both players symmetrically, so that only a fraction of the budget increase is given to the contest prize; the slope of the expected payoff function is reduced. In part (i) of Proposition 4, the budget is not sufficient to achieve full symmetry between the players and a cost of wrong selection of zero; in this case, a small prize is given to ensure that efforts are positive so that the contest can work as a selection mechanism. Since the expected cost of erroneous selection is independent of the contest prize, lowering k from 1 gives the principal an extra incentive to train the laggard, and this incentives becomes stronger as k falls. L, there is no problem of erroneous selection, since the laggard has been trained sufficiently to have the same expected ability as the opponent, and the principal uses any budget increases to increase expected effort
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