In many situations, agents exert effort in order to get
promoted to a better-paid position, where the reward for that position is fixed
and where agents compete among themselves for those positions. Tournament
theory considers a group of agents competing for a fixed set of prizes. In this
case, all that matters for winning is one’s positions relative to others,
rather than one’s absolute level of performance.
(a) Discuss the reasons that a firm might wish to employ
the tournament scheme described above. Consider the effects on the incentives
of both the firm and the workers.
(b) Discuss the reasons that a firm might not wish to
employ the tournament scheme described above. (c) State one specific prediction
of tournament theory and provide an example of empirical evidence in support of