INFLUENCE OF INEQUITY AVERSION ON RANK-ORDER TOURNAMENT

The rank-order tournament implements incentives with unfair payment. However, the inequity aversion that has been approved by a series of economic game experiments and by which any unfair allocation will result in disutility definitely, is ignored in the existing literatures while the traditional hypothesis of purely self-interest is followed. By incorporating inequity aversion into the standard frame, this paper systematically analyses the influence of the inequity aversion on the incentive efficiency and the incentive structure of the rank-order tournament. It is found that the inequity aversion surely will reduce the incentive efficiency and thereby change the incentive structure. Therefore, in order to design an optimal rank-order tournament, the principal should screen and evaluate properly the strength of the inequity aversion of the relevant participators in advance, which is significant for enterprises to establish a efficient incentive system.