Tournament theory

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In economics, the concept of tournament theory explains that large differences in power or wages are often based on very small, relative differences in performance of the participants.

This explanation goes against the more traditional reasoning in economic theory, which puts great emphasis on marginal productivity when it comes to determining wage levels.

The most obvious examples of this can be found in high-profile "Winner takes all" situations like the competition for the position of CEO of a company. However, the mechanism can be found at various levels in a company. For example, the members of a team might know that one of them is going to be promoted in a month. This creates competition among the members, which in turn (usually) leads to an increase in productivity.

In such tournaments, the deciding factor is relative performance, not absolute performance. Putting it in a less formal way, a worker does not have to be perfect to get the reward - he just has to be better than everybody else, no matter how small the difference is in the end.

This emphasis on relative performance leads to certain problems that can also be observed in real life. Such problems include sabotage and the potential of the situation escalating into a rat race.

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