THE WELFARE EFFECTS OF BANNING TOURNAMENTS WHEN COMMITMENT IS IMPOSSIBLE: SOME RESULTS FROM THE BROILER SECTOR

We consider the implications of banning tournament contracts and replacing them with fixed performance standard contracts in a multi-period model where the principal cannot commit to future contract parameters. A ban cannot increase total surplus in a static model. In a dynamic model, however, a ban of tournaments can increase total surplus by mitigating the ratchet effect. Calibrating our model to published data from the broiler sector, we find that a ban on use of contemporaneous and lagged relative performance data does not improve total surplus under most circumstances but could increase total surplus in a few instances of low wealth and unitary relative risk aversion. A more enforceable, period-by-period ban is even less likely to be welfare enhancing and does not hinder the principal from redistributing a fixed compensation pool from low ability growers to high ability growers.


Issue Date:
2003
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/22151
Total Pages:
33
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-08-24

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