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Pooling, Separating, and Cream-Skimming In Relative-Performance Contracts

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Author Info
Wang, Yanguo
Jaenicke, Edward C.
Abstract

Existing research on tournament-style contests suggests that mechanisms to sort contestants by ability level are unnecessary in the case of linear relative-performance contracts. This paper suggests that this result stems from uniform treatment of workers' marginal returns from effort, marginal disutilities of effort, and reservation wages. Here, we investigate relative-performance contracts with a model that allows these three factors to vary by growers' unobservable ability. Given this framework, we find that it is possible for processors to improve expected profits and total expected welfare by replacing a single contract offering meant to pool all growers with an offering of two contracts meant to separate growers by ability. Under some circumstances, a "cream-skimming" contract offering designed to attract only workers above a minimum ability level can also improve expected profits.

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Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24639.

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Date of creation: 2005
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Handle: RePEc:ags:eaae05:24639

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Keywords: Production Economics;

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  11. Carmichael, H Lorne, 1990. "Efficiency Wage Models of Unemployment--One View," Economic Inquiry, Oxford University Press, vol. 28(2), pages 269-95, April.
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  15. Tsoulouhas, Theofanis & Vukina, Tomislav, 2001. " Regulating Broiler Contracts: Tournaments versus Fixed Performance Standards," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 83(4), pages 1062-73, November. [Downloadable!] (restricted)
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  16. Ito, Takatoshi, 1988. "Labor Contracts with Voluntary Quits," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 100-131, January. [Downloadable!] (restricted)
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