"This paper compares macroeconomic results related to efficiency wages, contracts with bonus and tournaments in a framework with unverifiable effort. When effort is fully observable, both contracts with bonus and tournaments, unlike efficiency wages, solve the incentive problem without generating involuntary unemployment. Only tournaments, however, allow attainment of the Pareto optimal employment level. If effort is not fully observable, previous results must, to some extent, be reconsidered. Contracts with bonus also produce involuntary unemployment, while tournaments, in addition to continuing to produce a higher level of employment, generate involuntary unemployment only if a shirker who is not caught has some probability of winning."

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