Tournament Fever and the Perception of StrategicUncertainty in Performance Contests

As firms implement tournament bonus reward schemes, mainly the idea is to introduce competition amongst their agents in the order to promote their performance.Tournaments in which agents compete for a bonus by investing effort, are frequentlyapplied, e.g., in development races, political contests, and promotion tournaments.The fallibility of evaluation processes and the inherent variability of competitors' effort choices introduce uncertainty to tournament settings with respect to the outcome.If heterogeneous agents interact in such a setting, experimental results suggest thatincreasing uncertainty leads to more excess of effort if compared to optimality (Avra-hami et al., 2007). This paper experimentally investigates whether the observed overperformance in the tournament is similar to overbidding in auctions. Furthermore,it disentangles two possible sources of over-performance: either biased responses to,or wrong beliefs of, opponents' effort choices. We show that over-performance can beexplained by "tournament fever": agents overreact to own beliefs, if compared to bestresponses, and mainly overestimate their opponents. Leveling uncertainty inuencesboth overshooting and the precision of beliefs.