Department of Economics

In many principal-agent relations, objective measures of the agents' performance are not available. In those cases, the principals have to rely on subjective performance measures for designing incentive schemes. Incentive schemes based on subjective performance measures open the possibilities for in influencing activities by the agents. This paper extends Lazear and Rosen's (1981) model of rank-order tournaments by considering further competition between the agents in a bribery game after production but before selection of the winner. The paper studies how the bribery game affects the principal's design of the rank-order tournament and how the anticipation of the bribery game affects the agents' effort choices.