Trial-Based Tournament: Rank and Earnings

Trial-based tournament is a widespread hiring mechanism in organizations. Upon a job opening, an applicant is tried out at the job, then swaps with another competing applicant, and so on, with each non-competing worker holding the same position across trials. The job is offered to the applicant whose trial has had the most positive effect on the organization's output. We formalize this tournament model, deriving measures of relative performance that can be used to rank workers for each job and assess their comparative advantage when absolute performance cannot be observed. As a second goal, we study the relationship between tournament rank and earnings as determined by marginal productivity. We show that pay is a weakly increasing function of tournament rank, and we characterize organizations for which pay strictly reflects tournament rank and vice-versa. These organizations are linear and top-down biased, and they strictly include the popular class of von Neumann-Morgenstern organizations. The analysis implies that hierarchical organizations that promote fairness in pay should not have too many layers.