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Rank Uncertainty in Organizations

Author

Listed:
  • Marina Halac
  • Elliot Lipnowski
  • Daniel Rappoport

Abstract

A principal incentivizes a team of agents to work by privately offering them bonuses contingent on team success. We study the principal's optimal incentive scheme that implements work as a unique equilibrium. This scheme leverages rank uncertainty to address strategic uncertainty. Each agent is informed only of a ranking distribution and his own bonus, the latter making work dominant provided that higher-rank agents work. If agents are symmetric, their bonuses are identical. Thus, discrimination is strictly suboptimal, in sharp contrast with the case of public contracts (Winter 2004). We characterize how agents' ranking and compensation vary with asymmetric effort costs.

Suggested Citation

  • Marina Halac & Elliot Lipnowski & Daniel Rappoport, 2021. "Rank Uncertainty in Organizations," American Economic Review, American Economic Association, vol. 111(3), pages 757-786, March.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:3:p:757-86
    DOI: 10.1257/aer.20200555
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    Citations

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    Cited by:

    1. Ian M. Schmutte & Nathan Yoder, 2022. "Information Design for Differential Privacy," Papers 2202.05452, arXiv.org, revised Dec 2022.
    2. Roweno J. R. K. Heijmans, 2023. "Unraveling Coordination Problems," Papers 2307.08557, arXiv.org, revised Aug 2023.
    3. Li, Fei & Song, Yangbo & Zhao, Mofei, 2023. "Global manipulation by local obfuscation," Journal of Economic Theory, Elsevier, vol. 207(C).
    4. Amir Habibi, 2023. "Pay Transparency in Organizations," Rationality and Competition Discussion Paper Series 395, CRC TRR 190 Rationality and Competition.
    5. Kets, Willemien, 2021. "Organizational Design: Culture and Incentives," SocArXiv 3y8t4, Center for Open Science.
    6. Raphael Soubeyran, 2021. "Pro-social Motivations, Externalities and Incentives," Working Papers hal-03212888, HAL.
    7. Heijmans, Roweno J.R.K., 2023. "Unraveling Coordination Problems," Discussion Papers 2023/20, Norwegian School of Economics, Department of Business and Management Science.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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