Testing Tournaments? An Appraisal of the Theory and Evidence

By Michael Gibbs

The theory of tournaments as incentive schemes has generated substantial interest. Tournament theory is unique in generating incentive-based predictions about wage structures across the firm. As such, it may be more easily testable than other incentive theories. It has also been proposed as an explanation for very high CEO compensation. In this paper, I appraise the state of empirical and theoretical research on tournaments in furthering our understanding of compensation and incentives in organizations. I argue that many existing tests are not very helpful in assessing the relevance of tournaments in this setting. I propose more precise tests, but conclude that several of these tests may be difficult to implement with compensation data. I identify shortfalls in tournament theory suggested by current evidence on compensation practices and the limitations this imposes on empirical work. The arguments are illustrated with evidence on tournaments from personnel data of a single firm.

This paper may be hard to find. For an Acrobat version click here.

Materials provided are for Educational Use Only. All articles are the sole Copyright of their respective publishers.