Performance bundling in multi-dimensional competitions

Abstract

In this paper, we investigate circumstances in which performance bundling can be used as an effective instrument to foster effort supply in multi-dimensional competitions between two (possibly asymmetric) players. We find that besides a beneficial cost-saving effect that is diminishing with the asymmetry across players, performance bundling can cause a counterproductive unbalancing effect, which intensifies with this asymmetry. Thus, performance bundling (pure or partial) is desirable only if the players are sufficiently symmetric. Otherwise, a set of separate contests is optimal. Our model provides a new perspective for analyzing incentive schemes in contest environments that involve competitions in multiple dimensions.