In each of these cases, doing better than everybody else (either by winning a game, getting tenure, or landing a place on the bestseller list), earns a much bigger prize than whatever consolation is offered for second place. The model can also be used to explain how people will behave in other tournament settings such as sports, academia, and even writing. The CEO is probably motivated to keep their job as well. While a CEO might not work five times as much as the vice president of marketing, the promise of such a large raise upon getting a promotion is an excellent way to motivate somebody to work hard in the position they are currently in. This also solves the problem of determining output values that are difficult to measure. Rather than paying people exactly what they are worth, employees can be motivated to work harder now if they are given a massive pay increase as a result of being promoted. Tournament theory was first put forth to explain why companies can have such large pay gaps between those who are promoted and those who are not. In a new article published in American Business Review, two authors seek to explain the social dynamics of tournaments and provide a review of the literature on the topic through a very interesting historical example: the Allied capture of Hitler’s Eagle’s Nest.

For cases like these, economists turn to tournament theory to explain why people act the way they do, how to incentivize them, and what happens when people realize that they must do better than everyone else to win. Whoever gets first place takes a massive prize, and whoever comes behind that gets nothing. In some cases, winning isn’t everything but rather the only thing.

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