Endogenous versus exogenous allocation of prizes in teams - Theory and experimental evidence

We present a model where compensation within a team is determined either exogenously by a third party or endogenously through a bargaining process among team members. In the exogenous case, we compare equal rewards with a tournament design. In the endogenous case, members compete in their efforts for the right to propose the distribution of the prize. Failure to reach an agreement on the: proposal is costly and the role of proposer rotates in the order of members' efforts. We show in an experiment that tournaments induce higher efforts than equal rewards and that the influence of exogenously or endogenously allocating the prize depends on the specific bargaining rules in the endegenous case. (c) 2005 Elsevier B.V. All rights reserved.