IDEAS home Printed from https://ideas.repec.org/a/ucp/jlabec/v15y1997i3p466-94.html
   My bibliography  Save this article

On the Efficiency of the Rank-Order Contract under Moral Hazard and Adverse Selection

Author

Listed:
  • Yun, Jungyoll

Abstract

This article analyzes the efficiency of the rank-order contract for a finite number of risk-neutral agents under both moral hazard and adverse selection. The first-best outcome is shown to be supported by a set of rank-order contracts which penalize a small fraction of agents but do so heavily. The article also shows how these rank-order contracts compare with those giving a large prize to few agents. Finally, the article provides an informal argument for why firms do not follow a penalty-giving rank-order contract in their promotion policies as often as the theory predicts. Copyright 1997 by University of Chicago Press.

Suggested Citation

  • Yun, Jungyoll, 1997. "On the Efficiency of the Rank-Order Contract under Moral Hazard and Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 466-494, July.
    • Handle: RePEc:ucp:jlabec:v:15:y:1997:i:3:p:466-94
    DOI: 10.1086/209868
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/209868
    File Function: full text
    Download Restriction: Access to full text is restricted to subscribers. See http://www.journals.uchicago.edu/JOLE for details.
    File URL: https://libkey.io/10.1086/209868?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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 841-864, October.
    2. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-364, June.
    3. Barry Nalebuff & David Scharfstein, 1987. "Testing in Models of Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(2), pages 265-277.
    4. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    5. Bhattacharya, Sudipto & Guasch, J Luis, 1988. "Heterogeneity, Tournaments, and Hierarchies," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 867-881, August.
    6. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 881-919.
    7. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ghazala Azmat & Marc Möller, 2018. "The Distribution of Talent Across Contests," Economic Journal, Royal Economic Society, vol. 128(609), pages 471-509, March.
    2. Christian Riis, 2010. "Efficient Contests," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 643-665, September.
    3. Riis, Christian, 2008. "Efficient Contests," MPRA Paper 10906, University Library of Munich, Germany.
    4. Theofanis Tsoulouhas, 2017. "Do tournaments solve the adverse selection problem?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 675-690, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matthias Kräkel, 2006. "Splitting Leagues," Journal of Economics, Springer, vol. 88(1), pages 21-48, June.
    2. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    3. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
    4. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    5. P.-J. Jost & M. Kräkel, 2005. "Preemptive behavior in sequential-move tournaments with heterogeneous agents," Economics of Governance, Springer, vol. 6(3), pages 245-252, November.
    6. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    7. Anja Schöttner & Veikko Thiele, 2010. "Promotion Tournaments and Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 699-731, September.
    8. Matthias Kräkel, 2002. "U-Type versus J-Type Tournaments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(4), pages 614-637, December.
    9. Kräkel, Matthias, 2004. "Emotions and Incentives," IZA Discussion Papers 1270, Institute of Labor Economics (IZA).
    10. Paul Hek & Daniel Vuuren, 2011. "Are older workers overpaid? A literature review," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 436-460, August.
    11. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    12. Kräkel, Matthias, 2004. "Tournaments versus Piece Rates under Limited Liability," Bonn Econ Discussion Papers 8/2004, University of Bonn, Bonn Graduate School of Economics (BGSE).
    13. Spencer Bastani & Lisa Dickmanns & Thomas Giebe & Oliver Gürtler, 2022. "Competition for Promotion Can Induce Household Specialization between Equally Competitive Spouses," CESifo Working Paper Series 9660, CESifo.
    14. Alexander K. Koch & Eloïc Peyrache, 2011. "Aligning Ambition and Incentives," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(3), pages 655-688.
    15. Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
    16. Gürtler, Oliver & Kräkel, Matthias, 2010. "Optimal tournament contracts for heterogeneous workers," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 180-191, August.
    17. O. Brown Jr., William, 1998. "Transaction costs, corporate hierarchies, and the theory of franchising," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 319-329, August.
    18. Kräkel, Matthias, 2005. "Emotions and the Optimality of Unfair Tournaments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 45, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    19. Hans K. Hvide & Yanren Zhang, 2021. "Too big to succeed? Overstaffing in firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 784-798, November.
    20. Kräkel, Matthias, 2012. "Competitive careers as a way to mediocracy," European Journal of Political Economy, Elsevier, vol. 28(1), pages 76-87.
    21. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlabec:v:15:y:1997:i:3:p:466-94. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JOLE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.