NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rank-Order Tournaments as Optimum Labor Contracts

Edward P. Lazear, Sherwin Rosen

NBER Working Paper No. 401 (Also Reprint No. r0230)
Issued in November 1979
NBER Program(s):   LS

This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.

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Document Object Identifier (DOI): 10.3386/w0401

Published: Lazear, Edward P. and Rosen, Sherwin. "Rank-Order Tournaments as Optimum Labor Contracts." Journal of Political Economy, Vol. 89, No. 5, (October 1981), pp. 841-864.

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