Optimal tournament contracts for heterogeneous workers

We consider a rank-order tournament between workers with different abilities. Under Malcomson’s self-commitment property, the employer optimally uses individual tournament prizes to extract rents from the workers. Without the self-commitment property, individual prizes are used to make the asymmetric competition less uneven by discriminating against the more able worker (i.e., he is offered a lower winner prize than the less able worker). In this spirit, individual prizes serve as a substitute for handicaps.