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The Value of Commitment in Contests and Tournaments when Observation is Costly

2004; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.655390

1556-5068

Felix Várdy, John Morgan,

Auction Theory and Applications

We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader's behavior. In a contest, the follower can pay to observe the leader's effort but cannot observe the effectiveness of that effort. In a tournament, the follower can pay to observe the effectiveness of the leader's effort but not the effort itself. We show that this distinction matters significantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are sufficiently small.