Thomas Noe (Said Business School): Turning up the heat: The demoralizing effect of increased competition on risk taking and effort in contests

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.

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