Rank-Order Tournaments as Optimum Labor Contracts
1981/10/01 by Edward P. Lazear, Sherwin Rosen · 4,634 citations
Economics, Econometrics and Finance · Mathematics · Psychology · Social Sciences · #Adverse selection #Business #Compensation (psychology) #Economic Policies and Impacts #Economic theories and models #Economics #Experimental Behavioral Economics Studies #Finance #Incentive #Labour economics #Mathematics #Microeconomics #Order (exchange) #Piece work #Psychology #Quality (philosophy) #Rank (graph theory) #Social psychology
paper · open access · doi:10.1086/261010
published in Journal of Political Economy 89(5), 841-864 (University of Chicago Press)
openalex publication_date 1981/10/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/06
Abstract
This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous in ability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.
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