Core readings

Lazear, Edward P. and Sherwin Rosen. "Rank-Order Tournaments as Optimum Labor Contracts." Journal of Political Economy 89, no. 5 (1981): 841-64.

The original theoretical analysis of tournaments as an incentive device in organizations.  Proves the equivalence of tournaments and individual piece rates when workers are risk neutral.   When workers are risk averse,  however, tournaments can be economically more efficient than individual piece rate contracts when individual workers’ productivity is subject to common shocks. 

Rosen, S. 1986. “Prizes and Incentives in Elimination Tournaments.” American Economic Review, 76(4): 701-715.

Rosen’s classic paper that analyses promotions and raises inside companies as a form of elimination tournament.  Studies the optimal prize structure, arguing that raises associated with the top positions must be larger because promotion to these ranks no longer bestows the option to compete at even higher levels.  Thus, a large first-place prize gives survivors something to shoot for, independent of past performances and accomplishments. 

Knoeber, Charles R. “A Real Game of Chicken: Contracts, Tournaments, and the Production of Broilers”.Journal of Law, Economics and Organization5(2) (Fall 1989): 271-92.

Contract farmers who produce broilers are paid according to their cost performance relative to a small number of peers.   Knoeber argues that this arrangement substantially reduces the compensation risk faced by the farmers without compromising their incentives to control costs. Tournaments also facilitate technical change by allowing the principals –large integrators like Perdue and Tyson—to experiment with breeding, feed and veterinary practices without exposing growers to additional risk. 

Gibbons, Robert, and Kevin J. Murphy, 1990. Relative performance evaluation for chief executive officers. ILR Review, 43(3): 30-S.

Studies the compensation contracts of chief executive officers (CEOs) using data on 1,668 CEOs from 1,049 corporations from 1974 to 1986. Shows that CEOS are paid (and retained) on the basis of their firm’s performance relative to its industry and market performance.  This incentivizes CEOs while insulating their pay from common shocks.  

List, John, Daan Van Soest, Jan Stoop, and Haiwen Zhou. “On the Role of Group Size in Tournaments: Theory and Evidence from Lab and Field Experiments” NBER Working Paper No. 20008Issued in March 2014.

What happens to agents’ work incentives when a principal adds additional contestants to a tournament without changing the size of the prize?   While one might think that marginal work incentives are automatically reduced, that is not the case. In fact, adding a contestant has two effects:  the 1/N effect reduces incentives because each person has a smaller chance of winning the prize.  But the competition effect raises incentives because each person now needs to beat more people to win the prize, necessitating a higher effort.  Interestingly, when the distribution of luck is uniform, these two forces exactly offset each other, so a principal can induce more people to work at zero extra cost just by admitting another person to the competition.  The authors test these predictions using field data on fishing competitions.  

Newer Resources

Sahadi, Jeanne, (2015). “Amazon workplace story raises dread of 'rank and yank' reviews,” CNN Money, August 17.

Amazon's “stack ranking” (or “rank and yank”) performance review system requires supervisors to rank all employees, and to identify the worst performers.    

Wikipedia. "Vitality Curve".

A vitality curve is a performance management practice that calls for individuals to be ranked or rated against their coworkers. It is also called stack ranking, forced ranking, and rank and yank.”

Gross P. Daniel, (2018). ” Creativity Under Fire: The Effects of Competition on Creative Production,” NBER working Paper No. 25057.

Empirically estimates the incentive effects of competition on individuals' creative production. A sample of commercial logo design competitions, and a novel, content-based measure of originality shows that intensifying competition induces agents to produce original, untested ideas over tweaking their earlier work, but heavy competition drives them to stop investing altogether.

Fang, Dawei, Thomas Noe and Philipp Strack, (2020). “Turning up the heat-- the discouraging effect of competition in contests,”  Journal of Political Economy. 128 (5). 

Theoretically studies the effects of Increasing competition in homogeneous tournaments.  Contrary to the standard model of tournaments, finds that  increasing contest competitiveness  -by making prizes more unequal, scaling up the competition, or by adding new contestants-- always discourages effort.  These results suggest that muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output.

Joshua Graff Zivin and Elizabeth Lyons The Effects of Prize Structures on Innovative Performance NBER working paper no. 26737, February 2020.   

When the object is to produce successful innovations, this field experiment in a large life sciences company shows that a winner-takes-all prize is more effective than  the same amount of prize money shared across the ten best innovations. 

Lemus, Jorge and Guillermo Marshall. 2021. Dynamic Tournament Design: Evidence from Prediction Contests Journal of Political Economy 129(2). 

Online contests have become a prominent form of innovation procurement, but little is known about their optimal design.  The authors study the impact of a providing a leaderboard on outcomes in such contests using a student competition.  While the impact of impact of a leaderboard is theoretically ambiguous –some participants may get discouraged and quit, while others may decide to raise effort to stay remain competitive-- the authors find that a leaderboard on average improves competition outcomes.

Liu, Qi and Bo Sun 2023 Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking American Economic Journal: Microeconomics 2023, 15(2): 568–598

 Suppose that CEO’s care about their relative wealth (compared to other CEOs), not just their absolute wealth.  How would we expect this to affect the types of contracts stockholders offer to CEOs?  The authors show that in equilibrium, all firms might choose to pay CEOs for luck, in addition to paying for performance.  This is because –if other firms are paying for luck—your own risk-averse CEO will value insurance against a compensation shortfall relative to their executive peers.