Seoul Journal of Economics - Vol. 25 , No. 2

[ Article ]
Seoul Journal of Economics - Vol. 25, No. 2, pp. 207-221
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 May 2012
Received 01 Dec 2011 Revised 25 Jan 2012 Accepted 23 Feb 2012

Noisy and Subjective Performance Measure in Promotion Tournaments
Illoong Kwon
Assistant Professor, Graduate School of Public Administration, Seoul National University, 599 Gwanak-ro, Gwanak-gu, Seoul 151-742, Korea, Tel: +82-2-880-8551, Fax: +82-2-882-3998 (ilkwon@snu.ac.kr)

JEL Classification: D82, D86, M52


This paper considers both incentive and sorting effects of a promotion tournament, and analyzes the optimal degree of uncertainty in the agents' performance measure. In a subjective promotion tournament where the winner is determined by the principal's belief about the agents' ability, this paper shows that a noisy performance measure can have a positive incentive effect and a negative sorting effect. Therefore, it can be optimal for the principal to intentionally choose a noisy performance measure.

Keywords: Noisy performance measure, Subjective tournament, Sorting


I would like to thank Michael Waldman, Young-Ro Yoon, and the participants of a seminar at Seoul National Univeristy, and 2011 Conference for Tournaments, Contests, and Relative Performance for helpful comments and suggestions. All remaining errors are mine.

1. Aoyagi, M. “Information Feedback in a Dynamic Tournament.” Games and Economic Behavior 70 (No. 2 2010): 242-60.
2. Biais, B., and Casamatta, C. “Optimal Leverage and Aggregate Investment.” Journal of Finance 54 ( No. 4 1999 ): 1291-323.
3. Cai, G., Wurman, P.R., and Chao, X. “The Non-existence of Equilibrium in Sequential Auctions When Bids Are Revealed.” Journal of Electronic Commerce Research 8 (No. 2 2007): 141-56.
4. Ederer, F. Feedback and Motivation in Dynamic Tournaments. mimeo, UCLA, 2009.
5. Gershkov, A., and Perry, M. Tournaments with Midterm Reviews. mimeo, University of Bonn, 2006.
6. Gibbons, R., and Waldman, M. “Careers in Organizations: Theory and Evidence.” In O. Ashenfelter and D. Card (eds.) Handbook of Labor Economics. 3B, Chapter 36, NY, USA: North Holland, 1999.
7. Goltsman, M., and Mukherjee, A. Information Disclosure in Multistage Tournaments. mimeo, University of Western Ontario, 2006.
8. Hellwig, M. A Reconsideration of the Jensen-Meckling Model of Outside Finance. Discussion Paper No. 9422, WWZ University of Basel, 1994.
9. Hvide, H. K. “Tournament Rewards and Risk Taking.” Journal of Labor Economics 20 (No. 4 2002): 877-98.
10. Kim, S. K. “Dual Agency Model, Reporting Frequency.” Seoul Journal of Economics 18 (No. 1 2005): 21-44.
11. Kräkel, M. “Competitive Careers as a Way to Mediocracy.” European Journal of Political Economy 28 (No. 1 2012): 76-87.
12. Kräkel, M., and Sliwka, D. “Risk Taking in Asymmetric Tournaments.” German Economic Review 5 (No. 1 2004): 103-16.
13. Kwon, I. Risk Taking in Subjective Promotion Tournaments. mimeo, Seoul National University, 2011.
14. Lazear, E., and Rosen, S. “Rank Order Tournaments as Optimal Labor Contracts.” Journal of Political Economy 89 (No. 5 1981): 841-64.
15. Mezzetti, C., Pekec, A., and Tsetlin, I. “Sequential vs. Single-Round Uniform-Price Auctions.” Games and Economic Behavior 62 (No. 2 2008): 591-609.
16. Moldovanu, B., and Sela, A. “Contests Architecture.” Journal of Economics Theory 126 (No. 1 2006): 70-96.
17. O'Keeffe, M., Viscusi, W. K., and Zeckhauser, R. J. “Economic Contests: Comparative Reward Schemes.” Journal of Labor Economics 2 (No. 1 1984): 27-56.
18. Palomino, F., and Prat, A. “Risk Taking and Optimal Contracts for Money Managers.” Rand Journal of Economics 34 (No. 1 2003): 113-37.
19. Tullock, G. “Efficient Rent Seeking.” In J. M. Buchanan, R. D. Tollison, and G. Tullock (eds.), Toward a Theory of the Rent-Seeking Society. College Station: Texas A&M University Press, pp. 97-112, 1980.
20. Wang, R., and Zhang, J. “The Role of Information Revelation in Elimination Contests.” The Economic Journal 119 (No. 536 2009): 613-41.
21. Wang, Z. “The Optimal Accuracy Level in Asymmetric Contests.” The B. E. Journal of Theoretical Economics 10 (No. 1 2010): Article 13.
22. Yildirim, H. “Contests with Multiple Rounds.” Games Economic Behavior 51 (No. 1 2005): 213-27.