AbstractIn their seminal contribution Lazear and Rosen (1981) show that wages based upon rank induce the same e¢ cient e¤ort as incentive-based reward schemes. They also show that this equivalence result is not robust towards heterogeneity in worker ability, as long as ability is private information, as it is not possible to structure contests to simultaneously satisfy self-selection constraints and first best incentives. This paper demonstrates that efficiency is achievable by a simple modification of the prize scheme in a mixed (heterogenous) contest. In the L&R contest, the winner's prize as well as the loser's prize are fixed in advance. In this paper I demonstrate that efficiency is restored by a modification of contest design, in which contestants choose from a menu of prizes.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 10906.
Date of creation: Apr 2008
Date of revision:
Tournaments; Labor Contracts;
Find related papers by JEL classification:
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-13 (All new papers)
- NEP-CTA-2008-10-13 (Contract Theory & Applications)
- NEP-LAB-2008-10-13 (Labour Economics)
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