Rank Uncertainty in Organizations

51 Pages Posted: 8 Apr 2020 Last revised: 13 Apr 2020

See all articles by Marina Halac

Marina Halac

Yale University - Department of Economics

Elliot Lipnowski

Columbia University

Daniel Rappoport

Chicago Booth

Date Written: April 12, 2020

Abstract

A 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.

Keywords: mechanism design, information design, contracting with externalities, unique implementation, pay discrimination, pay secrecy

JEL Classification: D82, D86, L22

Suggested Citation

Halac, Marina and Lipnowski, Elliot and Rappoport, Daniel, Rank Uncertainty in Organizations (April 12, 2020). Available at SSRN: https://ssrn.com/abstract=3553935 or http://dx.doi.org/10.2139/ssrn.3553935

Marina Halac

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Elliot Lipnowski (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Daniel Rappoport

Chicago Booth ( email )

5807 S Woodlawn Ave
Chicago, IL 60637

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