Rank-Order Tournaments as Optimum Labor Contracts

Abstract

It is sometimes suggested that compensation varies across individuals much more dramatically than would be expected by looking at variations in their marginal products. This paper argues that a compensation scheme based on an individual's relative position within the firm rather than his absolute level of output will, under certain circumstances, be the preferred and natural outcome of a competitive economy. Differences in the level of output between individuals may be quite small, yet optimal "prizes" are selected in a way that induces workers to allocate their effort and investment activities efficiently.

Career Incentives and “Publish or Perish” in German and U.S. Universities

“…The theoretical foundation of all of these studies is the tournament model introduced by Lazear and Rosen in 1981. Lazear and Rosen (1981) use sports tournaments as a starting point to study the incentive effects of tournaments and career incentives. They show that, in economic terms, tournaments are characterized by four particular features that must be addressed and can be best explained with an analogy to a tennis tournament (see also Lazear, 1998).…”

Should Aid Reward Performance? Evidence from a Field Experiment on Health and Education in Indonesia

“…The performance bonus is structured as relative competition between villages within the same subdistrict ( kecamatan ). By making the performance bonuses relative to other local villages, the government sought to minimize the impact of unobserved differences in the capabilities of different areas on the performance bonuses (Lazear and Rosen 1981; Mookherjee 1984; Gibbons and Murphy 1990) and to avoid funds flowing towards richer areas. We discuss the impact of the relative bonus scheme in Section 4C below.…”

“Undemocracy”: inequalities in science

“…First, given the positive externalities of science (7), the more skewed rewards are, the greater the incentive for outstanding scientific work that will ultimately benefit all of humanity (8, 9). Second, as a profession, science is supposed to practice what Merton called universalism (10), a norm which dictates that evaluation in science be based solely on merit rather than on functionally irrelevant factors such as gender, race, nationality, age, religion, and class (2, 10).…”