Article
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

A highly acclaimed result in contract theory is that tournaments are superior to piece rate contracts when the agents are risk averse and their production activities are subject to a relatively large common shock. The reason is that tournaments allow the principal to trade insurance for lower income to the agents. Our analysis shows that this celebrated result does not carry over to the case when a limited liability constraint limits the payments the principal can make, provided that the liquidation value of the firm is sufficiently small. This finding has important implications for the vast number of limited liability firms. Tournaments are still optimal when the liquidation value of the firm is intermediate or large, even though the limited liability constraint is still binding for intermediate values. Surprisingly, uncertainty in the price of output strengthens the need for tournaments by expanding the range of liquidation values over which tournaments are optimal, because price uncertainty introduces additional bankruptcy risk.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... Moldovanu et al. [9] and Dubey et al. [10] studied the optimal prizes and punishments for tournament. Marinakis and Tsoulouhas [11] found that when the principal was confronted with the limited liability constraint, the incentive efficiency of tournament would decrease. Klein and Armin [12], Knyazev [13] and Roland et al. [14] analyze the optimal effort incentives and prize structures in the dynamic ladder tournaments in which some agents will be eliminated in each stage tournament. ...
... From (10), (11) and the tight (6), the average wage is ...
... Proof 1 From Eqs. (11) and ...
Article
Full-text available
The optimal tournament for the heterogeneous contestants is described and developed in approach of game theory, which includes the sorted tournament between the strong contestants with high ability, the sorted tournament between the weak contestants with low ability, and the pooled tournament between the strong and the weak contestants. By comparing the equilibrium results of the incentive structure, the efforts level, and the expected profits in each kind of tournament, it is found that the strong contestants can get more utilities in the pooled tournament, and hence prefer to take part in the pooled tournament to compete with the weak competitors, while the weak contestants only can get the reservation utility in both the sorted and pooled tournament, and hence do not care about the abilities of competitors. The principal will choose and implement the sorted tournament because he can acquire more profits than that in the pooled tournament.
... This is because, in the optimal tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease to satisfy liquidity constraints for agents and this provides higher-power incentives than under piece rate contracts. In addition, Marinakis and Tsoulouhas (2013) further analyze the compari- son of the two compensation schemes under the condition that a limited liability (or bankruptcy) constraint restricts the principal's ability to make payments. The limited liability imposed on the principal implies that the base payment in a tournament or a piece rate scheme cannot exceed the liquidation value of the firm; otherwise, the firm would go bankrupt. ...
... Therefore, the issue of the superiority of optimal tournaments over piece rate contracts is subject to the ranges of liquidation value. Marinakis and Tsoulouhas (2013) first demonstrate that in the absence of limited liability, optimal tournaments dominate optimal piece rate contracts if the common shock is larger than a fraction of the idiosyncratic shock. In contrast, optimal tournaments are dominated by optimal piece rate contracts when the principal is subject to limited liability and the liquidation value of the firm is sufficiently small. ...
Preprint
In this paper, we consider a production model with one principal and two symmetric risk-neutral workers, who have two choices: making productive effort or sabotage effort targeting the competitor. Two different reward schemes, the rank-order contest (relative performance evaluation) and the piece rate contract (absolute performance evaluation), are compared from the perspective of the principal. In a rank-order contest, the principal establishes the top prize awarded to the winner with the second prize normalized to zero. In a piece rate contract, the principal provides the piece rate reward for workers' output. We first pin down the optimal design and identify the principal's maximum expected profits from the two reward schemes, which depend on both the unit price of output and structural parameters such as the effectiveness of productive and sabotage effort. By comparing maximum expected profits according to individual ranges, we show that neither reward scheme dominates the other when workers can make both productive and sabotage effort, and establish the existence and uniqueness of the critical price at which the difference between maximum expected profits of two reward schemes is zero. More specifically, the rank-order contest is superior to the piece rate contract if and only if the unit price is smaller than the critical price.
Article
Many experiments and field studies indicate that individuals have an asymmetric attitude towards gains versus losses. In this paper, we extend the canonic tournament model by assuming the workers' preferences exhibit disappointment aversion. First, we find the winning prize is first increasing and then decreasing in volatility and the losing prize shows the opposite. Furthermore, when the volatility exceeds a threshold, both the winning and losing prizes are reduced to zero. By contrast, there is no such kink for the risk aversion case. Finally, we find the piece rates always dominate rank‐order tournaments when the workers are disappointment averse.
Article
This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that there may be no need for ex ante screening through menus of offers. This is so because the principal becomes better informed ex post about agent types, via the realization of common uncertainty, and can effectively penalize or reward the agents ex post. Thus, unlike the standard adverse selection problem without common uncertainty where the principal always benefits from ex ante screening, it is shown that ex post sorting through relative performance evaluation reduces the scope for ex ante screening through menus, and can eliminate it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinal tournament which is uniform among employees. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.
Article
This paper fills in a gap in the tournament literature by developing a framework that can be used to analyze both cardinal and ordinal tournaments, as well as piece rates. The analysis aims to obtain a Pareto ranking of cardinal versus ordinal tournaments, which is an open question in the literature. The analysis shows that, surprisingly, cardinal tournaments are superior to ordinal tournaments. The rationale is that, by utilizing all the available information more efficiently, cardinal tournaments allow the principal to implement higher power incentives, which makes them superior even though they restrict the form of the contract more than ordinal tournaments. (JEL D82, D21)
Article
Full-text available
In this paper we show that sorting contestants in cardinal tournaments into more or less heterogenous groups creates different incentives for agents to exert effort. In partic­ ular we show that for a given mean of the tournament group's heterogeneity parameters, larger variance (more heterogenous agents) induces higher optimal effort. This implies that the principal can actually gain from heterogenizing the tournament groups. On the other hand, the effect of this change on growers' welfare is unclear because higher effort leads to higher productivity and hence higher payment, but also increases the cost of effort. Using broiler production contracts settlement data we empirically estimated a fully structural model of a cardinal tournament game with heterogenous players. Our counterfactual analysis shows that under reasonable assumptions the integrator's gain is actually larger than the growers' losses indicating that heterogenizing groups in cardinal tournaments may be efficient.
Article
Full-text available
A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents and production is subject to common shocks that are large relative to the idiosyncratic shocks. This is because tournaments get closer to the first best by filtering common uncertainty. This paper shows that, surprisingly, tournaments are superior even when agents are liquidity constrained so that transfers to them cannot fall short of a predetermined level. The rationale is that, by providing insurance against common shocks through a tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease which enables the principal to satisfy tight liquidity constraints for the agents without paying any ex ante rents to them, while simultaneously providing higher-power incentives than under piece rates. The policy implication of our analysis is that firms should adopt relative performance evaluation over absolute performance evaluation regardless of whether the agents are liquidity (wealth) constrained or not.
Article
Full-text available
This paper proposes an alternative to standard cardinal tournaments. The analysis contrasts "hybrid" cardinal tournaments to standard cardinal tournaments and piece rates. It shows that providing for partial insurance against common uncertainty via a hybrid tournament (in which the weights on absolute and group average performances are not equal) is always better for the principal than providing for full insurance against common uncertainty via a standard tournament (with equal weights), or than providing for no insurance at all via piece rates. Hybrid tournaments increase the principal's profit because the agents exert more effort in equilibrium.
Article
Full-text available
This article analyzes optimal livestock production contracts between an integrator company and many independent growers in three similar industries: broiler, turkey, and swine. The analysis provides an explanation for the simultaneous existence of distinct incentive schemes in these industries by examining the effects of bankruptcy. The key factors are shown to be the output price volatility and the firm size. With large companies dominating the broiler industry, a small price volatility facilitates the use of two-part piece rate tournaments. By contrast, given the prevalence of smaller companies in the swine industry, a larger price volatility generates a bankruptcy risk which renders the use of tournaments infeasible. Given the combination of medium-size companies in the turkey industry, an intermediate price volatility produces a mixed result where tournaments and fixed performance standards exist simultaneously.
Article
Full-text available
It is well known that comparative performance information can enhance efficiency in static principal-agent relationships by improving the trade-off between insurance and incentives in the design of explicit contracts. In dynamic settings, however, there may be implicit as well as explicit incentives, for example, managerial career concerns and the ratchet effects in regulation. The authors show that the dynamic effects of comparative performance information on implicit incentives can either reinforce or oppose the familiar (static) insurance effect and in either case can be more important for efficiency. The overall welfare effects of comparative performance information are thus ambiguous and can be characterized in terms of the underlying information structure. Copyright 1997 by the University of Chicago.
Article
Full-text available
We compare welfare effects of tournaments and piece rates in contracts with heterogeneous ability agents and demonstrate that tournaments that mix players of unequal abilities create a league composition effect. When leagues are fixed and the time horizon sufficiently long, piece rates improve welfare over tournaments. Using contract production data for broiler chickens, we estimate the variances of growers' abilities, common production shock, and grower's idiosyncratic shock. Growers' abilities are heterogeneous, and common production shocks are significant. Leagues in broiler tournaments disintegrate rapidly over time, suggesting that tournament contracts offer more welfare than piece rates.
Article
Full-text available
Should a firm favor insiders (handicap outsiders) when selecting a CEO? One reason to do so is to take advantage of the contest to become CEO as a device for providing current incentives to employees. An important reason not to do so is that this can reduce the ability of future CEOs and, hence, future profits. The trade-off between providing current incentives and selecting the most able individual to become CEO is the focus of this paper. If insiders are good enough (better or nearly as good as outsiders), incentive provision to insiders typically dominates and it is optimal to handicap outsiders, sometimes so severely that they have no chance to win the contest. However, if outsiders are sufficiently better than insiders, selection dominates and it is the insiders who are severely handicapped. This finding is in sharp contrast to the existing literature which has so far ignored this trade-off. In all, our model provides useful insight into contests to become CEO and rationalizes empirical regularities in the source of CEOs chosen by firms. In particular, our analysis helps to explain the lower tendency of firms in more heterogeneous industries and firms with a product or line of business organizational structure to select an outsider as CEO.
Article
Full-text available
This study reports experiments that examine outcomes when agents choose between a payment scheme that rewards based on absolute performance (i.e., piece rate) and a scheme that rewards based on relative performance (i.e., a tournament). Holding total payments in the tournament constant, performance is higher when the tournament option is winner-take-all compared to a graduated tournament (i.e., second and third-place performers also receive a payment). Performance is higher in the winner-take all tournaments even among participants that choose the piece-rate option. While there is a modest amount of overcrowding, there are no significant differences in overcrowding across conditions. Entry rates into the tournament and the relative ability of tournament entrants (compared to non-entrants in the same condition) are higher in the graduated tournament condition than the winner-take-all conditions. Consequently, the winner-take-all tournament is more efficient than the graduated tournament (incentive effects are stronger and the overcrowding is about the same), but the graduated tournament provides a more effective mechanism to identify the most capable performer in a talent pool.
Article
Full-text available
This paper analyses procurement when contractors have limited liability and when the sponsor cannot commit to any specific form of future negotiation. It shows that introducing limited liability enhances competition and thus the likelihood of bankruptcy. Among efficient auctions in which only the winner gets paid, the commonly used first price auction is shown to give the lowest probability of bankruptcy. Finally, it shows that the characterisation of a mechanism minimising the project’s cost results from trading-off bankruptcy costs with informational rents.
Article
Easily computed estimates of the mean and variance of a Normal distribution obtained from samples which are truncated or censored are described. The estimates require only a single auxiliary function which is conveniently tabulated. Worked examples are given for sample data subject to left and right truncation. Additional examples are given for left and right censoring for the two cases in which either the point of censoring is fixed or the number of censored items is known.
Article
This article analyzes the role of competitive compensation schemes (in which pay depends on relative performance) in economies with imperfect information. These compensation schemes have desirable risk, incentive, and flexibility properties; they provide for an automatic adjustment of rewards and incentives in response to common changes in the environment. When environmental uncertainty is large, such schemes are shown to be preferable to individualistic reward structures; in the limit, as the number of contestants becomes large, expected utility may approach the first-best (perfect information) level. We study the design of contests, including the optimal use of prizes versus punishments and absolute versus relative performance standards. The analysis can also be viewed as a contribution to the multiagent, single-principal problem.
Article
The contracts used to reward growers of broiler chickens in the United States base pay on a grower's performance relative to other growers. From a panel of data covering seventy-five growers over four years, we use simulation methods to measure the price and production risk shifted from growers to integrator companies by these contracts. we also decompose the risk in broiler production variability. We conclude that the bulk of the risk in our sample, which is primarily price risk, is shifted from growers through the use of production contracts.
Article
The optimal strategy of the principal is examined in an environment where there are (ex post) limitations on the maximum penalty that can be imposed on a riskneutral agent. Contrary to the case in which such limitations are not imposed, it is in the principal's interest to deliberately forego the opportunity to induce socially efficient behavior, and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and (perhaps) in certain very unproductive states. The properties of the contract are examined in detail.
Article
Relative performance schemes such as tournaments are commonly used in markets for a variety of livestock and processing commodities, while explicit versions of these schemes are rarely used in markets for fresh fruits and vegetables and specialty grains. We show how contracts for these latter commodities do in fact provide relative performance incentives, albeit indirectly, via a payment mechanism that depends on market prices. In such contracts, compensation is often an increasing function of revenue; this implements a relative performance scheme by making each grower's payment an increasing function of his own output but a decreasing function of other's output. Copyright 2001, Oxford University Press.
Article
We estimate willingness to pay (WTP) to operate under two types of contracts—tournaments (Ts) and fixed performance-standard contracts (F). Our results are consistent with the notion that subjects having social preferences for fairness and care about risk. That is, when subjects experience greater inequity under tournaments relative to fixed performance contracts, or experience greater revenue risk under tournaments, the gap between WTP for fixed performance and tournament contracts increases, ceteris paribus. Our results provide an explanation for grower dissatisfaction with tournament compensation schemes independent of possible concerns regarding opportunistic behavior by integrators.
Article
Using experimental economics, we compare the efficiency and welfare effects of tournaments and fixed performance contracts. Our subjects (agents) were generally better off under fixed performance contracts, but the advantage of the fixed performance contract disappears if the relative magnitude of the standard deviation of the common shock exceeds a critical value. Efficiency wise, agents tend to exert higher effort under fixed performance contracts, on average. Additionally, an increase in the common shock standard deviation appeared to be associated with lower effort under tournaments. Our results shed light on the potential impact of legislative proposals to ban tournament contracts. Copyright 2005, Oxford University Press.
Article
We consider two-player contests for a prize of common but uncertain value. For settings where one player knows the value of the prize, while the other only knows its prior distribution, we give conditions for when the uninformed agent is ex ante strictly more likely to win the prize than is the informed agent. In the special case of a lottery contest, equilibrium expenditures are lower under asymmetric information than if either both agents are informed or neither agent is informed.
Article
The paper analyzes the optimality of relative performance evaluation via two-part piece rate tournaments in incentive contracting with multiple agents and two-sided moral hazard. If the agents are risk-averse, it is shown that a tournament is optimal only when the following conditions hold: (i) there is common uncertainty inflicted on the activities of the agents that is not contingent on their actions, but can be contingent on the principal’s action; (ii) the principal sufficiently saves in transaction costs by employing a tournament; (iii) the number of agents is sufficiently large. Then the feedback effect of using a tournament to monitor the agents is that the principal’s moral hazard problem is relaxed when the principal takes a single action. It can also be relaxed when the principal can vary her actions with the agents but there are economies of scale in her activity. Absent common uncertainty, the optimum scheme is shown to be a fixed performance standard, rather than a tournament, but if the agents are risk-neutral, a tournament can still be optimal provided that (ii) and (iii) hold.
Article
This article examines a principal-agent model of financial contracting in which a risk-neutral entrepreneur (agent) makes an unobservable ex-ante effort choice while employing the investment funds of a risk-neutral investor (principal). The key innovation is that the investment contract is subject to statutory liability limits. Given these liability limits, two settings are considered, one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit, and another in which no such “monotonic contract” constraint is imposed. In the former case, a standard debt contract is shown to emerge and a “first best” effort choice is not achieved. In the latter setting, the optimum is characterized by a “live-or-die” payoff function, and a “first best” effort level may or may not be realized.
Article
We study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests. Players may win a prize for winning each component contest, as well as a prize for winning the overall race. Each component contest is an all-pay auction with complete information. We characterize the unique subgame perfect equilibrium analytically and demonstrate that it exhibits endogenous uncertainty. Even a large lead by one player does not fully discourage the other player, and each feasible state is reached with positive probability in equilibrium (pervasiveness). Expected effort in the component contests may be non-monotonic in the closeness of the race and realized individual effort may exceed the value of the prize by a factor that is proportional to the maximum number of stage victories required.
Article
Consider the optimal incentive compatible contract offered by a firm with private information to its risk-averse employees. If the firm is subject to a binding limited liability or bankruptcy constraint then the contract will yield underemployment in low productivity states (relative to full-information efficiency). Such contracts either yield underemployment in all states, or excessively high variability in employment.
Article
This paper investigates the interaction between a firm's contracts for labor and its contracts for credit under asymmetric information and limited liability, when workers are either always committed to their contract or they lack the power to commit ex post because arbitrage opportunities are available to them. The analysis contains two main results: First, contrary to the perceptions of the limited liability literature, where limited liability is thought of causing both underemployment and income underinsurance, limited liability is in fact shown to only cause underemployment. Existence of outside sources of credit eliminates the underinsurance side of the inefficiency, but can not eliminate underemployment. Second, the factor that does cause underinsurance is the existence of ex post arbitrage opportunities for the worker. Worker mobility leads to underinsurance regardless of whether limited liability is binding or not and even if outside sources of credit exist. Thus, underemployment stems from limited liability, and underinsurance stems from worker mobility.
Article
Tournaments, reward structures based on rank order, are compared with individual contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus an additive shock term that is common to all the agents. The principal observes only the output levels of the agents. It is shown that, in the absence of a common shock, using optimal independent contracts dominates using the optimal tournament. Conversely, if the distribution of the common shock is sufficiently diffuse, using the optimal tournament dominates using optimal independent contracts. Finally, it is shown that for a sufficiently large number of agents, a principal who cannot observe the common shock but uses the optimal tournament does as well as one who can observe the shock and uses independent contracts. Economics
Article
This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.
Article
Broiler chickens are raised by contract growers whose rewards depend explicitly upon relative performance. The authors use data on the performance of broiler producers facing both tournament and linear performance evaluation compensation structures to test three predictions from the theory of tournaments: that changes in the level of prizes that leave prize differentials unchanged will not affect performance; that, in mixed tournaments, more able players will choose less risky strategies; and that tournament organizers will attempt to handicap players of unequal ability or reduce mixing to avoid the disincentive effects of mixed tournaments. Their evidence is consistent with each prediction. Copyright 1994 by University of Chicago Press.
Article
This paper begins an investigation into the incentive problems at a firm when the effort of the employer and the employees combines to determine final output. The major conclusion is that optimal reward functions in this circumstance will in general value the performance of a worker relative to that of his peers. The paper thus joins a growing literature associated with the work of Lazear and Rosen on rank-order tournaments.
Article
In the typical regulatory scheme a franchised monopoly has little incentive to reduce costs. This article proposes a mechanism in which the price the regulated firm receives depends on the costs of identical firms. In equilibrium each firm chooses a socially efficient level of cost reduction. The mechanism generalizes to cover heterogeneous firms with observable differences. Medicare's prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here.
Article
This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.
Article
In this paper, the authors reconsider the basic model of "efficient rent-seeking." They stress the importance of the shape of the players' reaction curve in order to understand the impact of the technology of rent-seeking on the structure of the outcome of the game. The authors give a complete characterization of the pure strategy equilibria. Moreover, the possibility of preemption by a Stakelberg leader is discussed according to the nature of the technology of rent-seeking available to the agents. Copyright 1992 by Kluwer Academic Publishers
Article
This paper characterizes the optimal financial contract between a risk neutral entrepreneur and risk neutral lender/investors when the entrepreneur has limited liability, there is moral hazard, and the investor payoff function can depend on both output and output price but is nondecreasing in output. In this setting, the optimal contract is a price-contingent commodity bond that can be replicated by combining pure debt, commodity futures, and commodity call option contracts. Although a pure commodity bond contract is sometimes optimal, a pure debt contract is almost never optimal. Various properties of the entrepreneur's optimal price-contingent promised payment are described. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Article
The paper studies a contracting problem in which a Principal enters in two-sided moral hazards with N independent agents. There are no technological or informational linkages between the N agency problems: The Principal's costs are additive across agents; there is no common uncertainty in the agent's performance; and the Prinicipal can freely vary his actions across agents. Despite this, optimal incentive schemes essentially eliminate the Prinicipal's incentive problem when team size N is large enough. This implies that it is suboptimal to require each agent's compensation to depend only on his own outcome. The result also implies the existence of purely informational economies of scale to increasing team size. Thus, the concentration of otherwise unrelated transactions in a single 'firm' creates wealth through a more efficient use of information about the Principal's actions. The paper shows that extremely simple statistical contracts are approximately optimal in large teams. The outcome of such contracts is observationally indistinguishable from standard Principal-Agent contracts. This provides a theoretical justification for using standard Principal-Agent contracts in environments that involve two-sided hazard in a fundamental way.
Article
The authors develop two themes in the theory of incentive schemes. First, one need not always use all of the information available in an optimal incentive contract. Accounting information, which aggregates performance over time, is sufficient for optimal compensation schemes in certain classes of environments. Second, optimal rules in a rich environment must work well in a range of circumstances and cannot, therefore, be complicated functions of the observed outcome. The authors illustrate these ideas in a particular model where the agent has a rich space of controls, showing that the unique optimal compensation scheme is a linear function of profits. Copyright 1987 by The Econometric Society.
Article
This paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors. Firms have more information than do the owners of the factors of production and they are also subject to limited liability. We show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information. The firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined. We show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates.
Article
This paper derives equilibrium financial contract forms in a risk-neutral capital market with asymmetrically informed borrowers/entrepreneurs and investors. In doing so, the analysis generalizes the work of D. DeMeza and D. Webb (1987) by allowing for arbitrary profit distributions, arbitrary contract forms, and variab le investment choices. The main result of this inquiry is as follows. W hen higher-quality entrepreneurs have "better" ex post profit distributions (in the sense of the monotone likelihood ratio propert y), equilibrium contracts take a standard debt form so long as admissibl e investor payoff functions are monotone nondecreasing in firm profit. Without the monotonicity constraint, contracts often take a differen t, "live-or-die" form. Copyright 1993 by The London School of Economics and Political Science.
Article
Grower discontent with tournaments as mechanisms for settling poultry contracts can largely be attributed to the group composition risk that tournaments impose on growers. This article focuses on the welfare effects of a widely advocated regulatory proposal to prevent integrator companies from using tournaments and replace them with schemes that compare performance to a fixed standard. The analysis shows that the mandatory replacement of tournaments with fixed performance standards, absent any rules that regulate the magnitude of the piece rate, can decrease grower income insurance without raising welfare. However, replacing tournaments with fixed performance standards can simultaneously increase income insurance and welfare, provided that the magnitude of the piece rate is also regulated. Copyright 2001 by American Agricultural Economics Association