Optimal Noise Manipulation in Asymmetric Tournament

We fill a gap in the literature of asymmetric tournament by allowing the principal to optimally alter noise in relative performance evaluation, such that the observed performance of each agent is less or more dependent of ability and effort. We show that there exists an optimal noise level from the principal’s standpoint of expected profit maximization. It is shown that this optimal noise level is higher than what would induce the highest efforts from the two agents.