This paper argues that rank-order tournaments can be the optimal labor contract when workers are risk-neutral. It shows that tournaments can produce the same incentive structure as piece rates, which are generally considered superior when monitoring costs are low. However, when monitoring is costly, tournaments may be more efficient because they require less information to implement. The paper also shows that tournaments can be the social optimum when workers are risk-averse, as they can provide better incentives for high-risk activities. The analysis considers both two-player and N-player tournaments, as well as sequential tournaments with eliminations. It also discusses the implications of risk aversion and population heterogeneity in tournaments. The paper concludes that tournaments can be an efficient way to allocate resources when workers are risk-averse, and that the optimal prize structure depends on the variance of the random component of productivity. The paper also shows that tournaments can be used to sort workers in a way that leads to an efficient allocation of resources, but that this may not always be the case when workers are heterogeneous. The paper also discusses the implications of these findings for the structure of executive pay and the economic structure of handicapping systems.This paper argues that rank-order tournaments can be the optimal labor contract when workers are risk-neutral. It shows that tournaments can produce the same incentive structure as piece rates, which are generally considered superior when monitoring costs are low. However, when monitoring is costly, tournaments may be more efficient because they require less information to implement. The paper also shows that tournaments can be the social optimum when workers are risk-averse, as they can provide better incentives for high-risk activities. The analysis considers both two-player and N-player tournaments, as well as sequential tournaments with eliminations. It also discusses the implications of risk aversion and population heterogeneity in tournaments. The paper concludes that tournaments can be an efficient way to allocate resources when workers are risk-averse, and that the optimal prize structure depends on the variance of the random component of productivity. The paper also shows that tournaments can be used to sort workers in a way that leads to an efficient allocation of resources, but that this may not always be the case when workers are heterogeneous. The paper also discusses the implications of these findings for the structure of executive pay and the economic structure of handicapping systems.