Journal of Labor Economics Vol. 15 No. 3 1997
On the Efficiency of the Rank‐Order Contract under Moral Hazard and Adverse Selection
Abstract
This article analyzes the efficiency of the rank‐order contract for a finite number of risk‐neutral agents under both moral hazard and adverse selection. The first‐best outcome is shown to be supported by a set of rank‐order contracts which penalize a small fraction of agents but do so heavily. The article also shows how these rank‐order contracts compare with those giving a large prize to few agents. Finally, the article provides an informal argument for why firms do not follow a penalty‐giving rank‐order contract in their promotion policies as often as the theory predicts.
- DOI
- 10.1086/209868
- Volume
- 15
- Issue
- 3
- Pages
- 466-494
- Language
- en
- Sources
- openalex crossref