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

  • Wang, Yanguo
  • Jaenicke, Edward C.
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    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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    File URL: http://purl.umn.edu/19522
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    Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19522.

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    Date of creation: 2005
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    Handle: RePEc:ags:aaea05:19522
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