How Much Effort (and Incentive) to Regain Leadership

Sports championships, sales contests, idea-sourcing challenges, as many other competitions, can be understood as dynamic tournaments, in which rivals rise and fall in the provisional rankings as they compete over time for a terminal prize. Take the 1965 Italian Grand Prix auto race, which featured a Formula One record of 42 lead changes, or the 2010 Aaron's 499 NASCAR race featuring 88 lead changes with 28 different leaders. Such examples can also be found in the business world. For instance, the 2007 Netflix Prize competition to improve movie-suggestion algorithms featured eight leadership changes and five distinct leaders. This performance volatility can have important consequences for contestants' behavior. Yet, while the loss of leadership in dynamic tournaments is an important, widespread, and frequent phenomenon, little is known about its direct consequences.
Our paper fills this gap by looking at the effect of losing a leadership position on the effort exerted to regain leadership. Using behavioral theories, we predicted that former leaders would exert more effort than otherwise identical competitors. While it tends to attenuate over time, we find that having lost leadership has a long-lasting effect on effort. Moreover, we also find evidence that former leaders shift attention away from other tasks that do not directly affect tournament outcomes in order to concentrate more effort on the tournament.

Our results have implications for incentives design. Let's take the example of a firm launching an innovation contest to solve a complex problem, something like what Netflix did in 2007 to improve its recommendation system. Our results suggest that having a leaderboard with a frequent update of the interim ranking of the participants could foster increased effort and potentially lead to the discovery of more innovative solutions. To benefit from this dynamic, such a firm may opt for awarding different prizes to increase the frequency of leadership changes.
Things, however, are never straightforward. Our results also suggest that such a mechanism could lead to over-escalation and unintended substitution of effort that could eventually be detrimental to firms' performance. For instance, a firm organizing an internal innovation contest among its employees should consider that having a leaderboard could reduce effort on tasks unrelated to the tournament.

While we focused on dynamic tournaments, anecdotal evidence suggests that a similar behavioral response may be triggered in other settings, such as competition among firms for market share. For example, EDS's CEO Mike Smith once vowed to "fight to the bitter end" to regain the company's leadership position in IT services, which it had lost to IBM. Loss of leadership is an important phenomenon that can increase motivation and effort but also lead to unexpected downsides.