A Comparison of Tournaments and Contracts

@article{Green1983ACO,
  title={A Comparison of Tournaments and Contracts},
  author={Jerry R. Green and Nancy L. Stokey},
  journal={Journal of Political Economy},
  year={1983},
  volume={91},
  pages={349 - 364}
}
Tournaments, reward structures based on rank order, are compared with individual contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus an additive shock term that is common to all the agents. The principal observes only the output levels of the agents. It is shown that, in the absence of a common shock, using optimal independent contracts dominates using the optimal tournament. Conversely, if the… 

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