Tournaments and Incentives: Heterogeneity and Essentiality

This paper reexamines, and significantly modifies, Lazear and Rosens (1981) negative result, concerning the effect of ex ante heterogeneity of workers on the attainability of first-best efficiency using tournament contracts, even for risk-neutral workers. Both the issues of worker heterogeneity and the equivalence of tournaments with other contracts are examined for risk-averse workers, when (asymptotically) first-best efficiency is attainable with homogeneity. A new justification for the use of tournament contracts, and for restricting the comparison set for these schemes to a limited subset of contracts which includes piece-rates, is provided.