Sorting into Contests: Evidence from Production Contracts

In this paper we investigate sorting patterns among chicken contract producers. We show that the sub-game perfect Nash equilibrium of this contracting game reveals a positive sorting where higher ability producers sort themselves into contracts to grow larger chickens and lower ability types sort themselves into contracts to grow smaller birds. We also show that eliciting this type of sorting behavior is profit maximizing for the principal. In the empirical part of the paper, we first estimate growers’ abilities using a two-way fixed effects model and subsequently use these estimated abilities to estimate a random utility model of contract choice. Our results show that higher ability growers are more likely to self-select themselves into contracts with larger expected outputs (larger chickens) and the opposite is true for growers with lower abilities. The empirical results are strongly supportive of the developed theory.