Relative Performance Information in Tournaments with Different Prize Structures

Abstract

We investigate whether the effect of relative performance information on tournament performance depends on the tournament’s prize structure. We focus on the effect of relative performance information on two tournament prize structures: a two-tier structure in which only the top performer receives a reward and all other contestants receive an equal payoff that is lower (reward tournament) and a three-tier prize structure in which the top performer receives a reward, the bottom performer receives a penalty equal to the amount of that reward, and all remaining contestants receive an equal intermediate payoff (reward and punish tournament). Drawing on both economic and psychology theory, we predict and find that, compared with when relative performance information is not present, relative performance information has a negative effect on performance in a reward tournament but a positive effect on performance in a reward and punish tournament. Supplementary analysis reveals that bottom and middle performers drive these differences in performance, which are due to both differences in effort and in adoption of overly risky strategies. Our results show that relative performance information can have a differential effect on performance depending on the tournament’s prize structure. This insight can aid in the design of firm information systems and tournament incentive schemes.