Many companies administer wage policies based on tournaments or have different salaries attached to various promotion-based ranks within the company. Employees, however, do not always receive information about pay-level differences at higher ranks prior to joining the company. While some companies openly disclose prize spread information across these ranks, others keep such information secret. In this paper, we experimentally investigate whether the availability of tournament prize spread information enhances employee effort through both a selection effect and a motivation effect. We predict and find that when employees can select into tournaments of varying prize spreads (which proxies for an environment where prize spread information is available), high-ability employees are more likely than low-ability employees to select into the tournament with a larger prize spread. Thus, the availability of prize spread information produces a separation of employees based on ability. We also find that employees exert more effort when they can select into a tournament than when they are randomly assigned to one (which proxies for an environment where prize spread information is absent). We show that this result is driven by greater homogeneity in the ability of tournament contestants when the availability of tournament prize spread information provides self-selection opportunity.
JEL Classifications: C91; D83; M40.
Data Availability: Experimental data are available from the authors on request.