Adverse Incentive Effects of Competition?
Tournament theory, practice, and the "Superstar Effect" within firms.
As part of homework for my course on game theory—a biting hook, I know—I had the pleasure (no, really!) of reading and annotating Dr. Jennifer Brown’s 2007 paper, “Quitters Never Win: The (Adverse) Incentive Effects of Competing with Superstars.” In this paper, Dr. Brown posits a model describing the lower effort exhibited by non-superstar players in games dominated by a superstar.
The preceding shows that, when the disparity between the superstar and the other players is great and the purse-sharing (prize-sharing) non-existent, the other players put in less effort to win the prize. When the disparity between the players is less great and the prize-sharing greater, the expected effort increases. Dr. Brown’s model comports with intuition (mine, at least), but is it borne out empirically in reality?
To answer this question, Dr. Brown presents the reader a novel natural experiment: the presence of Tiger Woods on the performance of other players in golf tournaments! TL;DR: controlling for just about any confounding variable imaginable, and I encourage my readers to check out her highly readable paper in its entirely, Dr. Brown finds that the performance of top-ranked players is adversely impacted by competing against superstar Tiger Woods. The relevance to the broader economy? Dr. Brown sums up the importance of her findings pithily:
“organizations in which internal competition is a key driver of incentives should be cautious in using a “best-athlete” recruiting strategy… sales managers and law firms should be aware of the impact of introducing a superstar associate on the cohort’s overall performance.”
In short, while competition between firms is almost always good for the consumer, competition within a firm can lead to non-superstars putting in less effort and producing worse joint outcomes.