Efficiency gains from organizational innovation: Comparing ordinal and cardinal tournament games in broiler contracts

We analyze the contract settlement data of a poultry company who contracts the production of broiler chickens with a group of independent growers. The company originally used rank-order (ordinal) tournaments to compensate their contract growers and later switched to cardinal tournaments. Based on the observed payment mechanism we construct an empirical model of a rank-order tournament game and estimate structural parameters of the symmetric Nash equilibrium and then simulate growers' performance under the observed cardinal tournament contract. We found that the model with risk-averse agents fits the data better than the model with risk-neutral agents and that switching from a rank-order tournament to a cardinal tournament, while keeping the growers' ex-ante expected utility constant, improved efficiency. The principal (company) gains from the switch, whereas some of the agents (growers) gain and others lose depending on their realized productivity shocks.