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Efficient Contests

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  • Riis, Christian

Abstract

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.

Suggested Citation

  • Riis, Christian, 2008. "Efficient Contests," MPRA Paper 10906, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:10906
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    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. Martin L. Weitzman, 1976. "The New Soviet Incentive Model," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 251-257, Spring.
    3. Yeon-Koo Che & Ian Gale, 2003. "Optimal Design of Research Contests," American Economic Review, American Economic Association, vol. 93(3), pages 646-671, June.
    4. Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 195-221, February.
    5. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819, September.
    6. Holmstrom, Bengt, 1982. "Design of incentive schemes and the new Soviet Incentive model," European Economic Review, Elsevier, vol. 17(2), pages 127-148.
    7. 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.
    8. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826, September.
    9. 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.
    10. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833, September.
    11. Stefan Szymanski, 2010. "The Economic Design of Sporting Contests," Palgrave Macmillan Books, in: The Comparative Economics of Sport, chapter 1, pages 1-78, Palgrave Macmillan.
    12. 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.
    13. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
    14. 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.
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    Cited by:

    1. Kristoffer W. Eriksen & Ola Kvaløy & Trond E. Olsen, 2011. "Tournaments with Prize‐setting Agents," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 729-753, September.

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    More about this item

    Keywords

    Tournaments; Labor Contracts;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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