OPTIMAL CONTESTS

Firms frequently use contests to compensate their employees: an employee's pay depends on the ranking of his output compared to that of others, rather than on the absolute level of his output. This paper analyzes the design of a contest which maximizes the contestants' expected aggregate output, and describes two settings which yield opposite results. In one, prizes should be equal except for that given to the contestant with the lowest output. In the other setting, only the contestant with the highest output should obtain a meaningful prize.