Promotions and Incentives: The Case of Multi-Stage Elimination Tournaments

Abstract

Promotion tournaments play an important role for the provision of incentives in firms. In this paper, we extend research on single-stage rank-order tournaments and analyze behavior in multi-stage elimination tournaments. The main treatment of our laboratory experiment is a two-stage tournament in which equilibrium efforts are the same in both stages. We compare this treatment to a strategically equivalent one-stage tournament and to another two-stage tournament with a more convex wage structure. Confirming previous findings average effort in our one-stage treatment is close to Nash equilibrium. In contrast, subjects in our main treatment provide excess effort in the first stage both with respect to Nash predictions and compared to the equivalent one-stage tournament. The results for the more convex two-stage tournament show that excess effort in the first stage is a robust finding and that subjects react only weakly to differences in the wage structure.