revised version published in: Journal of Economics and Management Strategy, 2005, 14 (1), 187-207
Many experiments indicate that most individuals are not purely motivated by material self
interest, but also care about the well being of others. In this paper we examine tournaments
among inequity averse agents, who dislike disadvantageous inequity (envy) and
advantageous inequity (compassion). It turns out that inequity averse agents exert higher
effort levels than purely self-interested agents for a given prize structure. Contrary to
standard tournament theory first-best efforts can not be implemented when prizes are
endogenous. Several extensions are studied like the case of spiteful agents, sabotage,
asymmetric agents and an application on the choice between vertical and lateral promotions
within firms.
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