2005a. “Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence

Using experimental economics, we compare the efficiency and welfare effects of tournaments and fixed performance contracts. Our subjects (agents) were generally better off under fixed performance contracts, but the advantage of the fixed performance contract disappears if the relative magnitude of the standard deviation of the common shock exceeds a critical value. Efficiency wise, agents tend to exert higher effort under fixed performance contracts, on average. Additionally, an increase in the common shock standard deviation appeared to be associated with lower effort under tournaments. Our results shed light on the potential impact of legislative proposals to ban tournament contracts. Key words: agricultural contracts, common shocks, contract regulation, experiments, fixed perfor-mance contracts, tournaments. The regulation of agricultural production con-tracts has been a topic of debate in re-cent policy discussions at both the state and federal levels. These debates emerged from widespread grower discontent about the fair-ness of agricultural contracts and have led to legislative proposals designed to regulate agricultural contracts. One proposal would ban the use of relative performance contracts, which condition growers ’ payments on the per-formance of other growers through rank or-der tournaments. As Tsoulouhas and Vukina stated, “Growers are opposed to a system that bases their payments on how well or how poorly their neighbors perform ” (p. 1062). Such payment systems make it difficult for growers to predict their earnings for any given growing period. Although some lawmakers are pushed to ban tournament, few serious economic stud-ies have been undertaken to assess the poten-tial efficiency and welfare effects of alternative payment regimes. A study by Tsoulouhas an