First in Village or Second in Rome?*

Though individuals prefer high‐quality peers, there are advantages to being high up in the pecking order within a group. In this environment, sorting of agents yields an overlapping interval structure in the type space. Segregation and mixing coexist in a stable equilibrium. With transfers, this equilibrium corresponds to a competitive equilibrium where agents bid for relative positions and entails less segregation than the efficient allocation. More egalitarianism within organizations induces greater segregation across organizations, but can improve the allocation efficiency. Since competition is most intense for intermediate talent, effective personnel policies differ systematically between high‐quality and low‐quality organizations.