An Envelope Approach to Tournament Design

Abstract

Abstract. Optimal rank-order tournaments have traditionally been studied using a …rst-order approach. The present analysis relies instead on the construction of an "upper envelope"over all incentive compatibility conditions. It turns out that the …rst-order approach is not innocuous. For example, in contrast to the traditional understanding, tournaments may be dominated by piece rates even if workers are risk-neutral. The paper also o¤ers a strikingly simple characterization of the optimal tournament for quadratic costs and CARA utility, as well as an extension to large tournaments.