The paper analyzes the economic structure of rat races, which either emerge in signaling (as a means of handling informational problems in labor markets) or in genuine tournaments. The unifying element of such contests is a rank-order reward structure. The pervasive phenomenon that contestants compete with too much effort or wasteful investments, cannot be explained in a satisfying manner if fully rational behavior is assumed. Therefore, systematic distortions of contestants' cost benefit rationales and their causes are an important issue of this paper which closes by addressing some institutional solutions to curb too much effort or wasteful investments in rat races.
