This paper investigates the effect of heterogeneity in ability or strength among competitors in elimination tournament. The results demonstrate that the incentive effects of heterogeneity may be positive rather than negative in dynamic contests with multiple stages. In particular, the well-studied adverse effects of heterogeneity in static interactions are compensated by positive continuation-value and selection effects. Due to these positive dynamic incentive effects of heterogeneity that increase the incentives of relatively more able workers, heterogeneity is unlikely to be as detrimental as commonly perceived for incentives in organizations with multiple hierarchy levels. In particular, heterogeneity of the workforce may even be optimal from the perspective of a firm that provides incentives using a multi-stage promotion contest in some settings. We test the empirical implications using lab experiments and field data from professional basketball. The empirical results provide evidence that is consistent with the theoretically predicted positive dynamic incentive effect of heterogeneity. |
