Rank-Order Contracts for a Principal with Many Agents

Abstract

For a principal with many agents, rank-order contracts remain incentive compatible even when information about agents' performance is known only to the principal because the total payment from the principal to all agents taken together is independent of the outcome that occurs. Under wider conditions than those considered previously in the literature, there is shown to exist a rank-order contract equivalent, exactly or approximately, to any (nonlinear) piece-rate contract. Under those conditions, therefore, results that depend on the unenforceability of piece rates under such asymmetric information disappear if rank-order contracts can be used.