TY  - JOUR
AU  - Green, Jerry R
AU  - Stokey, Nancy L
TI  - A Comparison of Tournaments and Contracts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 840
PY  - 1982
Y2  - 1982
DO  - 10.3386/w0840
UR  - http://www.nber.org/papers/w0840
L1  - http://www.nber.org/papers/w0840.pdf
N1  - Author contact info:
Jerry R. Green
Harvard Business School
Baker Library 469
Soldiers Field
Boston, MA 02163
Tel: 617/495-6859
E-Mail: jgreen@hbs.edu

Nancy Stokey
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-0915
Fax: 773/834-3452
E-Mail: nstokey@uchicago.edu
AB  - Tournaments, reward structures based on rank order, are compared with individual contracts in a model with one risk-neutral principal and many risk-averse agents. Each agents' output is a stochastic function of his effort level plus an additive shock term that is common to all the agents. The principal observes only the output levels of the agents. It is shown that in the absence of a common shock, using optimal independent contracts dominates using the optimal tournament. Conversely, if the distribution of the common shock is sufficiently diffuse, using the optimal tournament dominates using optimal independent contracts. Finally, it is shown that for a sufficiently large number of agents, a principal who cannot observe the common shock but uses the optimal tournament, does as well as one who can observe the shock and uses independent contracts.
ER  -