Doctoral Dissertation Research in Economics: Asymmetric Shocks in Contests: Theory and Experiment

This award is funded in whole or in part under the American Rescue Plan Act of 2021 (Public Law 117-2).

This award funds research that will combine economic theory and laboratory experiments to investigate how the distributions of random shocks affects the effort provisions of rank-tournament participants. In rank-order tournaments, an individual’s competitive output equals the effort she or he exerts, plus a random shock. Because of their prevalence, tournaments have received a great deal of scholarly attention.

Other research has assumed that the distribution of the random shock is symmetric. However, some real world tournaments include asymmetric shocks. For example, in elite competitions like the Olympics athletes exert significant amounts of effort.

Their scores typically cluster near the boundary of possible performance. Consequently, there is no chance that an athlete will face an extremely positive shock, however, there is a small chance that an athlete will suffer an extremely negative shock. This project will combine theory and experiment to compare effort provisions in tournaments under different shock distributions.

The research design will allow the researchers to directly measure tournament participant’s effort and compare the incentive effects under different types of shocks. The findings of this research could develop an improved understanding of why and how the distributions of random shocks affect effort provision in competitive environments, shedding new light on how people make decisions when very bad outcomes are unlikely but possible.

This project uses theoretical and experimental methods to compare effort provisions in rank- order tournaments under different shock distributions. Theory finds that, under optimal principal-agent contracts, the effort exerted by tournament participants should be invariant to the shock distribution. However, this result has never been tested, as all existing empirical and experimental literature focuses on environments where the shock distribution is symmetric.

This project fills this gap. Methodologically, an effort-choice experiment is employed with treatments that differ in shock distributions. In that experiment, after players choose the effort they would like to exert, the computer then draws a random shock, independently for each player.

A player’s output is the effort she or he chooses, plus the random shock chosen by the computer. This experimental design directly measures a player’s effort and allows for the comparison of the incentive effects of different shocks. This project will extend and inform the current literature by shedding light on the influence of the shape of the shock distribution on a tournament participant’s effort decisions.

The results of this project will further facilitate a better understanding of how people make decisions when very bad outcomes are unlikely but possible.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.