U-type versus J-type tournaments as alternative solutions to the unverifiability problem

This paper discusses the properties of stylized U.S. (“U-type”) and Japanese tournaments (“J-type”), which can both solve the unverifiability problem of labor contracts. Under a zero-profit condition, both tournament types will yield first-best efforts if workers are homogeneous and risk neutral. This result will no longer hold for J-type tournaments if the employer has all the bargaining power. Moreover, if workers are risk averse, or if there is intermediate information, heterogeneity or unfairness, J-type tournaments may dominate U-type tournaments.