Green and Stokey (1983) compare tournaments and contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus a common shock. The principal observes only output levels. They show that, in the absence of a common shock, optimal independent contracts dominate tournaments. However, if the common shock is sufficiently diffuse, tournaments outperform contracts. For a large number of agents, tournaments perform as well as optimal independent contracts when the principal cannot observe the common shock. Tournaments are compared with contracts in a model where agents compete for prizes based on rank order. The paper shows that tournaments can be efficient when the common shock is significant, but less so when it is unimportant. The results highlight the importance of information about common shocks in designing optimal incentive schemes. The study concludes that tournaments are not necessarily optimal contracts but are often used due to their simplicity and effectiveness in large groups. The paper provides insights into the design of incentive schemes in organizations and the role of information in contract theory.Green and Stokey (1983) compare tournaments and contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus a common shock. The principal observes only output levels. They show that, in the absence of a common shock, optimal independent contracts dominate tournaments. However, if the common shock is sufficiently diffuse, tournaments outperform contracts. For a large number of agents, tournaments perform as well as optimal independent contracts when the principal cannot observe the common shock. Tournaments are compared with contracts in a model where agents compete for prizes based on rank order. The paper shows that tournaments can be efficient when the common shock is significant, but less so when it is unimportant. The results highlight the importance of information about common shocks in designing optimal incentive schemes. The study concludes that tournaments are not necessarily optimal contracts but are often used due to their simplicity and effectiveness in large groups. The paper provides insights into the design of incentive schemes in organizations and the role of information in contract theory.