Rank Uncertainty in Organizations
AbstractA principal incentivizes a team of agents to work by privately offering them bonuses contingent on team success. We study the principal's optimal incentive scheme that implements work as a unique equilibrium. This scheme leverages rank uncertainty to address strategic uncertainty. Each agent is informed only of a ranking distribution and his own bonus, the latter making work dominant provided that higher-rank agents work. If agents are symmetric, their bonuses are identical. Thus, discrimination is strictly suboptimal, in sharp contrast with the case of public contracts (Winter 2004). We characterize how agents' ranking and compensation vary with asymmetric effort costs.
CitationHalac, Marina, Elliot Lipnowski, and Daniel Rappoport. 2021. "Rank Uncertainty in Organizations." American Economic Review, 111 (3): 757-86. DOI: 10.1257/aer.20200555
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D62 Externalities
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory