Study On The Optimal Incentive Contract In Tournament Mechanism

Tournament mechanisms set incentives based on the relative performance rankingof agents to achieve the optimal incentive effect. As the mechanism with a lowmonitoring cost, in recent years, more and more business managers implement it inpratical. Accordingly, under conditions of perfect competition, imperfect competitionconditions and different oversight precision, the paper studies the U-type tournamentsand the J-type tournaments comparatively with mathematical modeling methods.First, under the perfect competition conditions，with the agent risk neutral, riskaverse and agents under the leading edge, compare the agent’s effort level, the principalexpected revenue and competition incentive structure trends in the U-type tournamentand J-type tournament. Research shows that the principal will organize more efficientthe Separate Tournament among risk-neutral agents, while the J-type tournament ismore efficient among the risk aversion agents and the leading edge.Therefore, theprincipal need to consider the different conditions when set the optimal tournamentmechanism and select the proper tournament type.Secondly, under the imperfect competition conditons, with the staff collusion,agent’s relative deprivation, investment in the human capital and n-person tournament,compare the agent’s effort level, the principal expected revenue and competitionincentive structure trends in the U-type tournament and J-type tournament. Researchshows that the U-type tournament is more efficient if the collusion exists; the J-typetournament is more efficient if agents invest human capital; if agents have a sense ofrelative deprivation, in both tournaments, the agents will achieve higher effort level, andthe principal will achieve higher revenue.Therefore, the principal need to consider thedifferent conditions when set the optimal tournament mechanism and select the propertournament type.Thirdly, under different level of supervision, with agents of self-interestedpreferences and agents of fair preferences, compare the agent’s effort level, thecompetition costs and competition incentive structure trends in the U-type tournamentand J-type tournament. Research shows that if the agents are self-interest, the U-typetournaments will achieve lower cost; if the agents prefer fairness, the J-type tournaments will achieve lower cost. Therefore, the principal need to consider thedifferent conditions when set the optimal tournament mechanism and select the propertournament type.