Fatter or Fitter? On rewarding and training in a contest

Abstract

Competition between heterogeneous participants often leads to low effort provision in contests. We consider a principal who can divide her fixed budget between skill-enhancing training and the contest prize. Training can reduce heterogeneity, which increases effort. But it also reduces the contest prize, which makes effort fall. We set up an incomplete-information contest with heterogeneous players and show how this trade-off is related to the size of the budget when the principal maximizes expected effort. A selection problem can also arise in this framework in which there is a cost associated with a contest win by the inferior player. This gives the principal a larger incentive to train the expected laggard, reducing the size of the prize on offer.