18. Juli 2017
“Turning up the heat: The demoralizing effect of competition in contests”
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 low-powered 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 a rationale for use of highly competitive contests in the shadow of the demoralization effect.