In 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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- Lazear, Edward P & Rosen, Sherwin, 1981.
"Rank-Order Tournaments as Optimum Labor Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 89(5), pages 841-64, October.
- Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
- Theofanis Tsoulouhas & Charles R. Knoeber & Anup Agrawal, .
"Contests to Become CEO: Incentives, Selection and Handicaps,"
Working Paper Series
002, North Carolina State University, Department of Economics, revised Jul 2004.
- Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer, vol. 30(2), pages 195-221, February.
- O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
- Yeon-Koo Che & Ian Gale, 2000.
"Optimal Design of Research Contests,"
Econometric Society World Congress 2000 Contributed Papers
1784, Econometric Society.
- Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
- Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
- Holmstrom, Bengt, 1982.
"Design of incentive schemes and the new Soviet Incentive model,"
European Economic Review,
Elsevier, vol. 17(2), pages 127-148.
- Bengt Holmstrom, 1979. "Design of Incentive Schemes and the New Soviet Incentive Model," Discussion Papers 456, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bhattacharya, Sudipto & Guasch, J Luis, 1988. "Heterogeneity, Tournaments, and Hierarchies," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 867-81, August.
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