Precision in U-type and J-type Tournaments

Abstract

In this paper I contrast the impact of precision, i.e., the level of accuracy with which workers' performance is assessed, on wage costs in U- and J-type tournaments. In U-type tournaments prizes are fixed. In J-type tournaments only an overall wage sum is specified. The principal can increase precision by including more signals in performance measurement. Doing so leads to stronger incentives in U-type tournaments, but not in J-type tournaments. The principal strictly prefers a U-type tournament if workers receive a rent under limited liability and the costs of increasing precision are low. However, if workers are inequity-averse and have unlimited liability, the J-type tournament leads to lower wage costs.