I thank the participants at the North Carolina State University March 2008 conference on Tournaments, Contests and Relative Performance Evaluation for their valuable comments. Comments from Espen R. Moen, Kira Mandella and two anonymous referees are highly appreciated.
Version of Record online: 28 SEP 2010
© 2010 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 19, Issue 3, pages 643–665, Fall 2010
How to Cite
Riis, C. (2010), Efficient Contests. Journal of Economics & Management Strategy, 19: 643–665. doi: 10.1111/j.1530-9134.2010.00265.x
- Issue online: 28 SEP 2010
- Version of Record online: 28 SEP 2010
In their seminal contribution, Lazear and Rosen (1981) show that wages based upon rank induce the same efficient effort as incentive-based reward schemes. They also show that this equivalence result is not robust toward heterogeneity in worker ability, as long as ability is private information because it is not possible to structure contests to simultaneously satisfy self-selection constraints and first-best incentives.
This paper demonstrates that efficiency can be achieved by a simple modification of the prize scheme in a mixed (heterogenous) contest where contestants learn their type after entry. If contestants know their type before entering the contest, rent extraction becomes an issue. Implications for optimal contest design are also explored. Finally, the relationship between effort maximizing contests and profit maximizing contests are discussed.