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WHY THE BENEFITS OF COMPETITION ARE OFTEN LOST

  • Published Date: February 2014

WHY THE BENEFITS OF COMPETITION ARE OFTEN LOST: New evidence on when competition is rejected despite its positive effects on cooperation

Competition between teams of workers in a firm or member states in an international organisation is a highly effective way of increasing cooperation within the teams and overall performance. But whether competition is accepted if people have a say depends on whether it is decided on a majority vote or can vetoed by a single group or individual.

These are among the findings of research by Thomas Markussen, Ernesto Reuben and Jean-Robert Tyran, published in the February 2014 issue of the Economic Journal. The results of their study may explain why, for example, multilateral free trade agreements are difficult to obtain when they must be adopted by all countries unanimously, as with the World Trade Organization.

The results may also explain why the introduction of majoritarian decision-making for matters concerning the single market of the European Union (EU) has been highly controversial. Majority decisions are an important reason for the advanced level of trade openness in the EU compared with other regional trade blocs.

The researchers note that competition and cooperation are often viewed as opposite modes of social interaction. In contrast, their study shows that competition increases cooperation, at least if the stage is properly set.

The setting that they analyse involves groups that face a ‘dilemma situation’, in which the group as a whole fares best if all group members cooperate but each individual has an incentive to ‘free-ride’ on others. Examples of such groups are teams of workers in a firm or member states in a political union, such as the EU.

The study considers a simple scheme of intergroup competition where the most cooperative team receives a bonus while the least cooperative pays a fine. The purpose of introducing competition between teams is to provide incentives to cooperate within teams.

Testing this proposition in a laboratory experiment with student participants, the researchers find that cooperation with this simple competitive scheme in place is almost twice (+80%) the level without such a scheme. Competition thus entails massive efficiency gains in this setting.

While the pronounced cooperation-enhancing effect of such competition is intriguing, the main innovation of this research is to investigate the popularity of intergroup competition as a remedy for the cooperation pro¬blem. Yes, competition works if it is imposed, but are people willing to submit themselves to competition if they have a say?

Because competition is often viewed as a hostile form of interaction and because competition tends to produce winners and losers, such schemes are likely to be unpopular with those who are supposed to compete, which means that the proposal may be rejected in a vote. Of course, a solution that works in principle but is not implemented in practice due to lack of popular support is no solution at all.

In the experiment, groups vote on whether to introduce competition or not. The results show that whether competition is implemented depends strongly on the specific voting rule used.

When a simple majority among all individuals in an organisation is required for approval, the researchers find that competition is almost always implemented. But if any group can veto competition (that is, when the rule requires majority within each of the groups), competition is adopted only about half as often as with simple majority (48% of the cases).

The explanation is that while most groups benefit significantly from competition, a minority are net losers. If these groups are given veto power, competition is often blocked and the efficiency gains that come with it are forgone.

The experiments were conducted with 171 undergraduate students in Denmark. An interesting question for further research is whether the simple competition scheme is equally efficient and popular in other (perhaps less well-educated) electorates and other (perhaps less market-oriented) countries.

The high efficiency and acceptance of competition observed in the experiment is also likely to hinge on the fact that the setting had a level playing field. Competition was fair because groups were symmetric ex ante – that is, they had the same technology and endowments and, thus, the same chance to win. Groups that are doomed to lose from the outset are likely to block competition if they can, even if competition would improve overall efficiency.

ENDS


Notes for editors: ‘Competition, Cooperation and Collective Choice’ by Thomas Markussen, Ernesto Reuben and Jean-Robert Tyran is published in the February 2014 issue of the Economic Journal.

Thomas Markussen is at the University of Copenhagen. Ernesto Reuben is at Columbia University. Jean-Robert Tyran is at the University of Vienna.

For further information: contact Thomas Markussen via email: Thomas.Markussen@econ.ku.dk; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).