TY  - JOUR
AU  - Lazear,Edward P.
AU  - Rosen,Sherwin
TI  - Rank-Order Tournaments as Optimum Labor Contracts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 401
PY  - 1981
Y2  - December 1981
UR  - http://www.nber.org/papers/w0401
L1  - http://www.nber.org/papers/w0401.pdf
N1  - Author contact info:
Edward P. Lazear
Graduate School of Business
Stanford University
Stanford, CA 94305
Tel: 650/723-9136
Fax: 650/723-0498
E-Mail: lazear@stanford.edu

Sherwin Rosen
Department of Economics University of Chicago
1126 East 59th Street
Chicago, IL   60637
Tel: 312-702-8166
AB  - 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.
ER  -