Internal vs External Competition in Contests

Abstract This paper studies how the internal competition affects the performance of teams in rank-order contests. I propose a stylized model where two heterogeneous teams, each consisting of two players, strive to win a single prize. Unlike the existing studies on the topic, which focus exclusively on external competition, I assume the presence of internal competition on the within-team level. As my results show, the intensity of internal competition has a positive effect on the team’s performance. Moreover, the model predicts positive effect of within-team heterogeneity. I test these theoretical predictions with the Formula 1 data and find that increasing in the intensity of internal competition by 1% raises the team’s probability of winning top-5 by 0.4% and top-3 by 0.29%. The results for within-team heterogeneity are controversial, no conclusion about the relation can be done.