The role of noise variance on effort in group contests

Abstract

We theoretically and experimentally examine the effect of noise variance and prize value on effort in individual contests and in three types of group contests: perfect-substitutes, best-shot, and weakest-link. For all contest types, we use the rank-order contest model, where effort and random noise determine performance. The theoretical model for individual contests predicts that effort will increase with prize value and decrease with noise variance. As expected, all subjects in our experiment decrease their efforts as noise variance rises, regardless of the value of the prize. Prize value, however, has no effect on effort. In group contests, each group consists of two players with different prize values. The player for whom the prize value is higher is referred to as a strong player; the other is referred to as a weak player. The theoretical model also predicts that exerted positive efforts will decrease with noise variance in all group contests. Our experimental results show that in perfect-substitutes and weakest-link contests, noise variance has no effect on either strong or weak subjects’ efforts. In best-shot contests, however, both strong and weak subjects decrease their efforts when noise variance increases. Finally, we compare the efforts of subjects in individual and group contests. We find differences only in perfect-substitutes and best-shot contests when the noise variance is high. Efforts are higher in perfect-substitutes contests and lower in best-shot contests compared to individual contests.