COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1254 Optimal Scrutiny in Multi-Period Promotion Tournaments Pradeep Dubey and Ori Haimanko May 2000 Consider a principal who hires heterogeneous agents to work for him over T periods, without prior knowledge of their respective skills, and intends to promote one of them at the end. In each period the agents choose effort levels and produce random outputs, independently of each other, and are fully informed of the past history of outputs The principal's major objective is to maximize the total expected output, but he may also put some weight on detecting the higher-skilled agent for promotion. To this end, he randomly samples n out of the T periods and awards the promotion to the agent who produces more on the sample. This determines an extensive form game Gamma (T,n), which we analyze for its subgame perfect equilibria in behavioral strategies. We show that the principal will do best to always choose a small sample size n. More precisely, if eta(T) is the maximal optimal sample size, then eta(T) /T approaches 0 as T approaches infinity. JEL Classification: C72, D82, J41 Key words: Multi-period promotion tournaments, extensive form games, subgame perfect equilibria, undominated sample sizes |
