Tournament Theory Research Articles

When Are Pay Gaps Good or Bad for Firm Performance? Evidence from China

ABSTRACTThere is still an ongoing debate regarding the firm performance implications of pay gaps between top executives and subordinate employees. This study integrates relative deprivation theory and tournament theory to investigate the potential nonlinear effects of pay gaps. We expect that at low levels of pay inequality, increased inequality hurts firm productivity, while at higher levels of pay inequality, increased inequality helps firm productivity. Our study of Chinese firms confirms that pay gaps have an approximately U-shaped relationship with firm performance. This nonlinear relationship is weaker in state-owned enterprises (SOEs) than in non-SOEs, suggesting that state ownership is an important moderator in the association. Overall, this study explains previous mixed findings regarding consequences of pay gaps with meaningful implications for policymakers and entrepreneurs in China and other economies with similar cultural and institutional backgrounds.

A Tournament Theory of Pork Barrel Politics: The Case of Japan

How do politicians motivate voters to turn out and support them? We posit that incumbents construct tournaments between groups and distribute rewards to groups based on the levels of electoral support provided. We test our propositions in Japan, where incumbents can discern relative levels of support provided by municipalities in their districts and influence spending in ways that reward certain municipalities over others. Using new data on approximately 3,300+ Japanese municipalities in 1980 to 2000, we show that when municipalities are ranked according to their levels of support for Liberal Democratic Party winners in their district, those at higher ranks get larger rewards, the difference in size of the reward increases at higher ranks, and those in districts where municipalities vary more in size also receive larger rewards. Our findings support the theory and help explain other features of Japanese politics, including why pork tends to flow to relatively unsupportive districts.

My Fortune is the Work of Others: A Response to Prof. John C. Coffee, Jr. Regarding Lockstep Law Firm Partnerships and Tournament Theory

My Fortune is the Work of Others: A Response to Prof. John C. Coffee, Jr. Regarding Lockstep Law Firm Partnerships and Tournament Theory

Compensation Gap of Executive Team and Innovation Efficiency

Based on the research of domestic and foreign scholars, this paper combines China’s unique economic environment and institutional background, based on the principal-agent theory and the tournament theory, and takes the data of 2007-2016 A-share listed companies in Shanghai and Shenzhen stock exchanges as the sample. This article studies the relationship between pay gaps and innovation efficiency within executive teams. Research shows that there is a significant negative correlation between the salary gap of executive teams and the innovation efficiency, indicating that the larger the salary gap of executive teams, the lower the efficiency of R & D investment. The results are consistent with the argument that larger tournament incentives allow managers to make less efficient R & D investments.

Making CEO Narcissism Research Great: A Review and Meta-Analysis of CEO Narcissism

Chief executive officer (CEO) narcissism is an important area of research due to the strategic implications of how this multifaceted personality trait affects CEO behavior. This article presents a combined meta-analytic and narrative review of CEO narcissism and makes future research recommendations. Our review and meta-analytic findings lead to the creation of a framework for CEO narcissism research focused on narcissistic CEO supply, demand, behavior, and consequences. Additionally, our review identifies five methods of measuring CEO narcissism, each with strengths and weaknesses. We find that while extant findings exhibit common themes, such findings remain mixed and potentially dependent upon methods. We recommend that future research expand beyond the strategic consequences of CEO narcissism to consider additional foci of the research framework and its moderators. Additionally, we suggest that research can benefit from moving beyond the predominant theoretical lenses of upper echelons theory and leadership theory to the lenses of the extended agency model of narcissism, the admiration-versus-rivalry perspective of narcissism, and tournament theory.

Individual incentives and workers’ contracts: evidence from a field experiment

AbstractWe present evidence on the operation of incentive pay from a field experiment in Pakistan, looking at piece rates and pay based on rank achieved in a tournament. Importantly, some workers are in contracts ‘tying’ them to the employer for several picking seasons; others are ‘untied’, in the sense of being employed for only the current season. We find that incentive pay (of either type) improves productivity by 30%, on average, but that there are important differences across the types of workers: in particular, tournament incentives are less effective amongst the tied workers. We suggest that our main results have implications for tournament theory and the design of incentive pay schemes, particularly with regard to the fact that they may discourage some workers and, thus, reduce incentives.

Governance structures and the compensation of powerful corporate leaders in financial firms during M&As

We examine the impact of mergers and acquisitions (M&As) on the compensation of powerful corporate leaders [i.e., boards of directors, including Chief Executives Officers (CEOs), Chief Financial Officers (CFOs), and Board Chairs] of acquiring firms. Using one of the largest datasets on M&As, directors’ compensation, and governance to-date, consisting of a sample of UK financials (banks, insurance firms, private equity firms, and speciality finance firms) over a 13-year period, our results obtained by employing multivariate regression analyses show that acquisitions, on average, have a positive and significant impact on directors’ compensation. This effect applies to both powerful corporate executives (CEOs, CFOs, and all other executive directors) and other non-executive directors. However, the positive acquisition effect on top executive compensation is much higher in larger and more complex acquisitions. We also find that much of the acquisition-related pay raises is equity-based rather than cash-based. Finally, we find CEOs to be the top beneficiaries from acquisitions. We interpret our findings within a multi-theoretical framework that draws insights from agency, executive power, managerial talent, and tournament theories of top executive compensation.

Prize Structure and Performance: Evidence from NASCAR

The predictions that emerge from tournament theory have been tested in a number of sports-related settings. Since sporting events involving individuals (golf, tennis, running, auto racing) feature rank order tournaments with relatively large payoffs and easily observable outcomes, sports is a natural setting for such tests. In this paper, we test the predictions of tournament theory using a unique race-level data set from NASCAR. Most previous tests of tournament theory using NASCAR data used either season level data or race level data from a few seasons. Our empirical work uses race and driver level NASCAR data for 1114 races over the period 1975–2009. Our results support the predictions of tournament theory: the larger the spread in prizes paid in the race, measured by the standard deviation or interquartile range of prizes paid, the higher the average speed in the race. Our results account for the length of the track, number of entrants, number of caution flags, and unobservable year- and week-level heterogeneity.

CEO power and labor productivity

PurposeThis paper aims to examine how Chief Executive Officer (CEO) power affects firm-level labor productivity.Design/methodology/approachThe authors rely on regression analysis to examine the relation between CEO power and labor productivity.FindingsFollowing prior research (i.e. the sequential rank order tournament theory), the authors predict that powerful CEOs lead to high labor productivity. They find a significant and positive relationship between CEO power and labor productivity. They further decompose labor productivity into labor efficiency and labor cost components and find a positive (negative) relationship between CEO power and labor efficiency (cost) component, suggesting that more powerful CEOs better manage labor efficiency and control labor cost. The results are also robust to various additional tests.Originality/valueThis study contributes to two streams of research: the CEO power literature in finance and the labor productivity and cost literature in accounting. To the best of the authors’ knowledge, it is the first study that performs a direct empirical test on the relation between CEO power and labor productivity.

A review on risk-taking in tournaments

Purpose This paper aims to summarize antecedents and consequences of risk-taking in tournaments and show the development of tournament optimization considering risk-taking. Moreover, further expansion expectations related to antecedents and consequences of risk-taking in tournaments and tournament optimization considering risk-taking are discussed. Design/methodology/approach A comprehensive bibliographic retrieval and further literature review and systematics re-organization are used to build the framework with respect to risk-taking in tournaments. Then, qualitative analysis is used to present conclusions of existing research. Findings By summarizing various antecedents, different consequences and tournament optimizations with regard to risk-taking in tournaments of existing research, the authors present a series of research opportunities regarding risk-taking in tournaments that can propel the advancement of tournament theory. Originality/value The studies on risk-taking in tournament have been recently received wide attention and are growing vigorously. Based on the summary and re-organization, the framework of literature studying risk-taking in tournaments is built. This literature review also helps researchers learn the advance of risk-taking in tournament and provides fruitful direction for future research on this topic.

Salary Distribution and Team Outcome: The Comparison of MLB and KBO

The effect of salary distribution on output productivity within the workplace has long been a topic of interest in labor economics. The salary compression hypothesis emphasizes cohesiveness among workers. However, tournament theory suggests that salary inequality may lead to diminished incentive to work, thus reducing average productivity. Cooperation among players is important for sports teams but a superstar is also an important factor in obtaining great outcomes in the sports industry. This paper specifies empirical models of the production function with exogenous efficiency factors for a baseball team using stochastic frontier model. This study also addresses the different salary distribution effects with respect to workforce characteristics by comparing two different baseball leagues, Major League Baseball with the Korean Baseball League. This paper concludes that tournament salary hypothesis is supported in MLB but salary distribution seems less important in the KBO.

Does the Regional Sense of Social Fairness Really Narrow the Executive-Employee Pay Gap?

Based on Chinese traditional Confucianism and under the policy background of “salary limit order”, this paper uses tournament theory and social comparison theory to research and analyze the relationship between regional social fairness and the executive-employee pay gap, its effect on employee productivity and the effect of the matching relationship on company performance incentives. Based on the questionnaire survey of China’s comprehensive social survey from 2010 to 2016 and the data of all A-share listed companies in China, we find that the regional sense of social fairness will significantly increase the salary gap of companies, and the higher the sense of social fairness, the greater the incentive effect of the salary gap on the production efficiency of ordinary employees, and the correct match between the sense of social fairness and the salary gap will promote the development of the performance of local enterprises. This means that the cultural environment will deeply affect the micro-governance of enterprises. We should attach importance to the role of hidden factors in the executive-employee pay gap, promote the rationalization of the income distribution pattern, and promote the development of the economy stably.

Unreliable is Better: Theoretical and Practical Impulses for Performance Management

This review aims to stimulate discussion about a comprehensive understanding of performance evaluation-namely, the taken-forgranted benefit of maximal reliable performance evaluation, where employee performance is evaluated with high levels of reliability (i.e., large samples of performance observations). So far, the management discipline has ignored the evidence-based view that one’s performance is better under unreliable performance evaluation compared to reliable performance evaluation. Drawing on tournament theory, behavioral research, and real-world sports data, we argue that while reliable performance evaluation boosts only superior employees, unreliable performance evaluation boosts all employees. The mechanisms that drive inferior and superior employees to perform better when evaluated unreliably substantiate that psychological insight is essential for efficient performance management. Overall, we complement the predominant thinking of performance management by offering innovative insights and implications that are significant for academics, employees, and employers.

Does Workplace Competition Increase Labor Supply? Evidence from a Field Experiment

This paper develops a novel field experiment to test the implicit prediction of tournament theory that competition increases work time and can therefore contribute to the long work hours required in elite occupations. A majority of workers in the treatment without explicit financial incentives worked past the minimum time, but awarding a tournament prize increased work time and effort by over 80% and lowered costs of effort or output by over a third. Effort was similar with alternative (piece rate, low-prize tournament) bonuses. Men worked longer than women in the high-prize tournament, but for the same duration in other treatments.

Does Workplace Competition Increase Labor Supply? Evidence from a Field Experiment

This paper develops a novel field experiment to test the implicit prediction of tournament theory that competition increases work time and can therefore contribute to the long work hours required in elite occupations. A majority of workers in the treatment without explicit financial incentives worked past the minimum time, but awarding a tournament prize increased work time and effort by over 80% and lowered costs of effort or output by over a third. Effort was similar with alternative (piece rate, low-prize tournament) bonuses. Men worked longer than women in the high-prize tournament, but for the same duration in other treatments.

Attainment Discrepancy and New Geographic Market Entry: The Moderating Roles of Vertical Pay Disparity and Horizontal Pay Dispersion

AbstractStudies in the behavioural strategy literature have examined the influence of attainment discrepancy on new geographic market entry with inconclusive results. We clarified the relationship between attainment discrepancy and new geographic market entry by considering the moderating effects of managerial pay gaps with concentration on vertical pay disparity and horizontal pay dispersion. The framework also contributes to our understanding of tournament theory and social comparison theory by identifying specified performance contexts under which types of pay gaps conform to or violate theoretical predictions. Empirical analyses based on a panel data of Standard and Poor’s (S&P) 500 firms from 1996 to 2006 showed that our hypotheses are largely supported.

Bonuses and Promotion Tournaments: Theory and Evidence

AbstractStandard models of promotion tournaments do not distinguish between wages and bonuses and thus cannot explain variation in the use of bonuses. We combine classic and market-based tournament theories to develop a model in which wages and bonuses serve distinctly different roles. We use this model to derive testable predictions which we test employing both a single firm data set and a data set encompassing a large segment of the Finnish economy. Our empirical analysis supports the testable predictions and shows that our theoretical approach better matches the data than alternative theories of bonus determination based on arguments already in the literature.

Cheat to win: How to hack tournament theory

Summary It may be surprising that one of the most popular compensation schemes in business is so open to being hacked – to having managers cheat to win. We explore tournament theory to detail its vulnerabilities to various forms of cheating unilateral and multilateral. We identify who is most likely to be involved and under what conditions. We describe the costs to the victims, to the firm, and to society. We outline the possible strategic effects – in terms of firm performance. And, we discuss possible ways to address these vulnerabilities to the schemes we rely on to motivate managers to put in the right efforts, to take the right risks, and to lead the right way.

Promotion Incentives, GDP Manipulation and Economic Growth in China: How Does Sub-National Officials Behave When They Have Performance Pressure?

In this paper, we attempt to answer two questions. What role does a mayor’s promotion incentive play in China’s regional economic growth? How do mayors behave when faced with promotion pressure? In doing so, we argue that significant GDP manipulation could partially reduce the explanatory power of promotion tournament theory in explaining China’s economic growth although through this tournament mechanism, the upper level government could still select high ability officials. To support our argument, we employ a regression discontinuity design that accounts for the age restriction imposed by the Communist Party of China (CPC) on the promotion of China’s prefecture-level city mayors. The empirical results show that mayors’ promotion incentives significantly increase the growth rate of statistical GDP by around 2% to 3%, while their effect on night-time light growth (an indicator of real economic growth) is merely 0.5%. This significant gap can be attributed to the artificial manipulation of GDP statistics, which is about 2.5%. The analysis points to the limits of performance-based promotion scheme in China and calls for caution when studying the complexity of sub-national officials’ behaviors when they have performance pressure.

Winning at a Losing Game? Side-Effects of Perceived Tournament Promotion Incentives in Audit Firms

Tournament-like promotion systems are the default in audit firms, which are generally internally owned professional partnerships. While awarding promotions in a contest-like fashion stimulates contestants’ motivation and productivity, it may also upset an organizations’ ethical climate and trigger ethically adverse behaviors. Since nearly all research on promotion tournaments in management has been conducted in public firms, little is known about how these incentive systems operate in professional partnerships. In this study, we analyze how the perception of the two controllable design parameters of promotion tournaments—the relative pay spread between winners and losers and tournament breadth in terms of the number of contestants that compete for a prize—affects audit firm behavior. Survey results provide evidence that the tournament’s perceived breadth prompts adverse behavior, as it does in public firms. Contrary to conventional wisdom, however, the perceived pay spread has no significant effect on adverse behavior, but triggers desirable behaviors instead. Our study suggests that promotion tournaments indeed provide powerful incentives, but also that understanding the unintended consequences of these incentives on organizational ethical climates and behavior requires tournament theory to be contextualized when it is applied in new settings like internally owned professional partnerships.