Incentives and motivation in dynamic contests

Abstract

This paper uses a contest setting to analyze the provision of intertemporal incentives in organizations. Should a principal repeatedly award small prizes or give a large prize that takes past performance into account? A simple theoretical model predicts higher efforts in the latter case. An experiment confirms this prediction, but the size of the effect is smaller than expected. This result reflects two observations of independent interest. First, there is a revenge effect for laggards in repeated contests: Laggards exert higher efforts than leaders with the same first-period effort level. Second, there is an intimidation effect for laggards in the single-prize case: Laggards exert lower efforts than leaders with the same first-period effort level. Moreover, we observe polarization in laggard behavior.