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The costs and benefits of tournament in a frictional labor market

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  • Zhu, Weichao
  • Wang, Lu
  • Lang, Youze

Abstract

This study provides a search and match model with endogenous firm growth, wherein firms post tournament contracts. We show that workers tend to shirk their efforts as firms grow if the right tails of idiosyncratic productivity shocks decay fast enough. Therefore, a dynamic innovation process of the compensation scheme is required to persistently provide incentives. Tournament induces wage dispersion both within and between firms. The quantitative analysis indicates that tournament induces better performances than the quota contract, especially with thin-tailed shock distributions. Nevertheless, with heavy-tailed shock distributions, single-prize schemes induce the involution problem, which reduces the performance improvement of enforcing tournament in large firms. This inefficiency is mitigated by offering prizes to multiple workers.

Suggested Citation

  • Zhu, Weichao & Wang, Lu & Lang, Youze, 2022. "The costs and benefits of tournament in a frictional labor market," Economic Modelling, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:ecmode:v:113:y:2022:i:c:s0264999322001511
    DOI: 10.1016/j.econmod.2022.105905
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    References listed on IDEAS

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    More about this item

    Keywords

    Frictional firm growth; Tournament; Wage dispersion; Involution;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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