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Optimal tournament contracts for heterogeneous workers

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  • Gürtler, Oliver
  • Kräkel, Matthias

Abstract

We analyze the optimal design of rank-order tournaments with heterogeneous workers. Iftournament prizes do not differ between the workers(uniform prizes), as in the previous tournament literature, the outcome will be ineffcient. In the case of limited liability, the employer may benefit from implementing more than first-best effort. We show that the employer can use individual prizes that satisfy a self-commitment condition and induce effcient incentives at the same time, thus solving a fundamental dilemma in tournament theory. Individual prizes exhibit two major advantages - they allow the extraction of worker rents and the adjustment of individual incentives, which will be important for the employer if he cannot rely on handicaps.
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Suggested Citation

  • Gürtler, Oliver & Kräkel, Matthias, 2010. "Optimal tournament contracts for heterogeneous workers," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 180-191, August.
  • Handle: RePEc:eee:jeborg:v:75:y:2010:i:2:p:180-191
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    Cited by:

    1. repec:eee:jeborg:v:139:y:2017:i:c:p:32-48 is not listed on IDEAS
    2. David Perez Castrillo & David Wettstein, 2014. "Discrimination in a new model of contests with two-sided asymmetric information," Working Papers 1407, Ben-Gurion University of the Negev, Department of Economics.
    3. Loukas Balafoutas & E. Glenn Dutcher & Florian Lindner & Dmitry Ryvkin, 2017. "The Optimal Allocation Of Prizes In Tournaments Of Heterogeneous Agents," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 461-478, January.
    4. St-Pierre, Marc, 2016. "The role of inequality on effort in tournaments," Mathematical Social Sciences, Elsevier, vol. 81(C), pages 38-52.
    5. Marc Gürtler & Oliver Gürtler, 2015. "The Optimality of Heterogeneous Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 33(4), pages 1007-1042.
    6. Jed DeVaro & Antti Kauhanen, 2016. "An “Opposing Responses” Test of Classic versus Market-Based Promotion Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 747-779.
    7. Migheli, Matteo, 2015. "Gender at work: Incentives and self-sorting," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 55(C), pages 10-18.
    8. Kräkel, Matthias & Schöttner, Anja, 2010. "Technology choice, relative performance pay, and worker heterogeneity," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 748-758, December.
    9. Oliver Gürtler, 2010. "Collusion in homogeneous and heterogeneous tournaments," Journal of Economics, Springer, vol. 100(3), pages 265-280, July.

    More about this item

    Keywords

    Heterogeneous workers Limited liability Rank-order tournaments Self-commitment;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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