Promotion and demotion contests

Abstract

With a fixed prize budget, to increase total effort, we design a two-stage lottery contest where heterogeneous agents face the prospect of promotion and the threat of demotion from one stage to the next. We develop two competing theoretical models to generate predictions about behavior: (i) the standard economic model and (ii) a behavioral model where agents derive non-monetary utility from winning. The experimental results provide strong support for the use of promotion and demotion in contests when abilities are homogeneous, however, they do not provide strong support for the use of promotion and demotion in contests when ability differences are large. Our experimental results are consistent with the predictions made by the behavioral model.