Do output-dependent prizes alleviate the sabotage problem in tournaments?

We investigate whether tournament prizes that depend on joint output ("variable prize tournaments") can alleviate the sabotage problem which is otherwise inherent in tournament struc- tures. In a game-theoretical model with three contestants, we compare fixed-prize tournaments with tournaments where prizes depend on contestants' joint output. Our analysis suggests that the incen- tives to sabotage in a fixed-prize tournament may be counteracted in a variable-prize tournament such that contestants no longer sabotage, but help one another. We empirically test the implications of our model with the help of a classroom experiment where we compare participants' choices in a fixed-prize treatment (FP) with those of a variable-prize treatment (VP) in a between-subjects design. Given our parametrization, we expect efforts to be identical in both treatments, and we expect sabotage in the FP treatment and no sabotage in the VP treatment. In accordance with the model, we find that participants in the fixed-prize tournament sabotage one another, whereas participants in the variable-prize tournament help one another. At the same time, participants' effort levels do not vary between the two treatments.