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Bank of Finland, Rauhankatu 19 B, Helsinki
Thomas Noe (Said Business School): Turning up the heat: The demoralizing effect of increased competition on risk taking and effort in contests
Co-authors: Dawei Fang and Philipp Strack
Abstract
We demonstrate that, when effort costs are convex, increasing competition in symmetric, complete-information, all-pay contests demoralizes contestants, leading to lower effort both on average and in the sense of second-order stochastic dominance. Thus, muting competition (e.g., adopting soft grading curves or lowpowered promotion rewards) improves contestant performance. We develop variability measures under which increased competition implies increased riskiness of contest outcomes and, using these measures, identify testable predictions and empirical evidence on the mean and variability of effort consistent with demoralization. Finally, we provide rationale for use of highly competitive contests in the shadow of the demoralization effect.
Research seminars organised by the Bank of Finland's research unit are held on Thursdays at 10:30–11:45 in Rauhankatu 19, 3rd floor big meeting room (unless indicated otherwise). Seminars are held in English.
Research seminars are open to all economists (unless indicated otherwise). Please register in advance at research(at)bof.fi by noon of the preceding day. Visitors will be escorted from Rauhankatu 19 B (Kirjasto/Library) entrance to the seminar room 10 minutes before the seminar.